Introduction

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Introduction

This is Ofcom’s sixth annual Communications Market Report, offering industry, stakeholders and consumers a reference tool to track the development of the UK communications sector. The report also provides an important context for the work that Ofcom undertakes in furthering the interests of consumers and citizens in the markets we regulate.

As well as providing data and analysis on the UK television, radio and telecoms markets, this report also focuses on relevant trends and developments in adjacent industries such as music and gaming. These sectors are increasingly important to our understanding of changing communications markets; consumers are dividing their time among a growing range of media types, platforms and devices. At the same time, companies are identifying ways in which new platforms and media can help bolster established revenue streams.

The UK communications industry continued to grow in 2008, albeit at a slower rate, driven by telecoms and television subscription revenue. It generated £51.8bn in 2008, up 0.2% year on year. Free-to-air advertiser-funded services such as television and radio saw their revenues fall as they felt the impact of an economic downturn. Early indicators suggest that advertising revenue has dropped further in 2009.

This year, we have commissioned our own research into how consumers’ attitudes towards communications services have been affected by the downturn. Amid this economic uncertainty, the Government’s Digital Britain report, published in June 2009, aimed to ensure the UK communications industry emerges from the recession as strong and internationally competitive. The European Commission has followed with its Digital Europe initiative.

But the progress of the communications industry has been substantial. At the end of March 2009, nine in ten homes had digital television; two-thirds of the nation had broadband; nearly a third had access to a DAB digital radio set; one in five radio listener hours in 2008 was through a digital platform and nearly a quarter of mobile subscriptions, or 17.9 million, were to 3G services. More than a quarter of homes had digital video recorders and in the report we provide a detailed analysis on consumer habits and usage of these devices.

And there is still evidence of an appetite for further innovation around products and pricing. Mobile phone operators have responded to the downturn with sub £10-per-month deals, while new content distribution models emerged in 2008/09 such as ‘free’ music services, online catch-up TV and micro blogging. Meanwhile, telecoms operators are rolling out super- fast broadband and greater numbers of consumers are buying communications services in ‘bundles’ from single suppliers. We explore these developments in detail in the report.

For the first time this year, we have also provided in this report insights into communications trends across the UK’s nations, comparing and contrasting consumption patterns, device adoption and content production in England, Northern Ireland, Scotland and Wales.

We publish this report to support Ofcom’s regulatory goal to research markets constantly and to remain at the forefront of technological understanding; it also fulfils the requirements on Ofcom under section 358 of the Communications Act 2003 to publish an annual factual and statistical report. It also addresses the requirement to undertake and make public our consumer research (as set out in Sections 14 and 15 of the same Act). We appreciate your feedback on all Communications Market reports. Please email your comments to Ofcom’s Market Intelligence team on [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 licence applications or significant market power or dominant market position or in respect of any other regulatory process for the purposes of the Communications Act 2003, the Wireless Telegraphy Act 2006, the Broadcasting Acts 1990 and 1996, the Competition Act 1998 or other relevant legislation.

2 Contents

Introduction 1 Key Points 4 1 The market in context 11 1.1 Introduction and structure 13 1.2 Key market trends 14 1.3 Communications markets and the recession 23 1.4 Consumers embrace DVRs 39 1.5 The nations’ communications markets 54 2 Television 65 2.1 Key market developments in television 67 2.2 The television industry 81 2.3 The television viewer 119 3 Radio 147 3.1 Key market developments in radio 149 3.2 The radio industry 159 3.3 The radio listener 181 4 Telecoms 195 4.1 Key market developments in telecoms 197 4.2 The telecoms industry 221 4.3 The telecoms user 241 5 Converging Markets 261 5.1 Converging communications markets 263 5.2 Content 265 5.3 Distribution and devices 299 6 Annexes 315 Glossary 317 Table of Figures 326

3 Key Points Key points: the market in context

Key market trends

 Availability of key communications services remained largely unchanged in 2008. Of the key communications services that are tracked by Ofcom, only the availability of local loop unbundling (LLU) services increased in the year (by four percentage points, to 84% of households) (page 15).

 Communications industry revenue (based on elements monitored by Ofcom) increased by 0.2% to £51.8bn in 2008, with television (in particular pay-TV subscriptions) the main driver of growth. Telecoms revenue remained flat, while radio revenues fell in 2008 (page 17).

 Household spend on communications services fell again in 2008. In real terms, UK households’ average spend on communications was £93.69 a month, down £4.39 on 2007. Spend on communications services accounted for 4.63% of total monthly household outgoings, down from 4.8% a year earlier (page 17).

 Consumer satisfaction with communications services increased in the year to Q1 2009, up to 89% compared to 86% in Q1 2008. Mobile telephony again scored highest out of the five communications services included in our research, with 94% of consumers either ‘satisfied’ or ‘very satisfied’ with their mobile service (page 19).

 Ofcom research shows that at the end of Q1 2009, 46% of UK homes bought communications services in ‘bundles’, up by seven percentage points since Q1 2008. The majority of these bundles were either fixed voice and broadband ‘double play’ (44%) or fixed voice, broadband and multichannel TV ‘triple play’ (34%) (page 20).

Communications markets and the recession

 Communications spend appears relatively robust when compared to alternative claims on disposable income. Meals/nights out and holidays are the expenditure categories most likely to be cut from consumers’ disposable income; only spend on toiletries and groceries appears more secure than that on communications products (page 26).

 However, consumers seem to see opportunities to save on their communications spending – for example, by bundling services or by deferring mobile handset purchases. Some consumers are also more likely now to shop around for communications services (page 26).

 Advertising expenditure is generally cyclical, and this is borne out in the latest revenue data from broadcasters. Radio industry revenue contracted year on year, and while overall television revenue rose, the commercial PSBs attracted less advertising revenue this year than last (page 35).

 While it is less clear that the telecoms industries have been affected by the economic downturn, mobile and broadband operators are affected by the competitive pressures of markets approaching saturation, and the increasing use of mobile phones rather than fixed-line phones is putting pressure on fixed-line operators (page 37).

4 Consumers’ use of digital video recorders (DVR)

 More than a quarter of consumers (27%) claimed to use a DVR at the end of Q1 2009, equivalent to 7 million homes, according to Ofcom research. This rose to nearly a third of consumers (31%) in multichannel television homes. These figures are a little lower than those from operator and sales data, which suggest that nearly 9 million DVRs had been sold in the UK at the end of Q1 2009 (page 41).

 Fifteen per cent of viewing across the five main PSB channels in 2008 was for recorded programmes, according to data from BARB, the television industry’s audience measurement organisation. In Sky+ homes this rose to 19%. Adults aged 16-34 are the group most likely to watch programmes recorded on a DVR; 19% of viewing among this age group was on a recorded basis in 2008, which compared to the lowest figure of 11%, for viewers aged 55 and over (page 42).

 Forty-two per cent of consumers said that they watched a greater variety of programmes since owning a DVR, although a third (33%) disagreed with this. Eighty per cent of consumers believe that they watch more programmes that they enjoy because of their DVR (page 51).

 DVRs are becoming increasingly advanced, offering viewers search functionality and ‘push’ video-on-demand, where programmes are downloaded to the hard disk drive, for example. Hard drives are also increasing in size. Some offer up to 250 hours of recording, up markedly from the 40 hours available on early generations of devices (page 53).

The nations’ communications markets

 Personal use of mobiles was more prevalent than use of fixed lines in every UK nation for the first time in 2009. Broadband was the fastest growing communications platform, with double digit take-up increases in England, Wales and Northern Ireland (page 57).

 UK consumers showed a renewed interest in ‘bundling’ services during 2008/09. Forty-six per cent of homes took two or more services from the same supplier. People in England were most likely to take a bundle, but growth was fastest in Wales and Northern Ireland (page 59).

 During 2008, spend per head on networked television production was highest in England during 2008 at £35.51; investment on TV hours for a nation was highest in Northern Ireland (£16.05), while expenditure on non-English language output was greatest in Wales at £24.38 (page 60).

 People in Scotland watched more TV than anywhere else in 2008 (4.2 hours/day/head versus UK average of 3.8). PSB TV output was most popular with viewers in Wales (62% share of viewing) and least popular in London (57%). Levels of radio listening across the four nations were similar at around 3.2 hours per listener per day. The popularity of the BBC’s radio services varied by nation – from 46% of listener hours in Scotland to 63% in Wales (page 61).

5 Key points: television

 Total television industry revenue grew by 1.3% to reach £11.2bn in 2008. This was largely driven by subscription revenue, which increased by 5.7% in 2008 to reach £4.32bn. Pay-TV providers increased subscriber numbers while products like multiroom and high-definition television also gained in popularity (pages 69 and 82).

 Total TV net advertising revenue was £3.47bn in 2008, down 3% year on year, as the gains in multichannel revenue, up 9.3% to nearly £1.3bn, helped to offset the reductions on the mainstream channels (page 69).

 Net advertising revenue for ITV1, GMTV1, Channel 4 and Five decreased 8% year on year to £2.1bn. The four main commercial PSBs undertook several cost-cutting measures as they felt the impact of the recession and the wider structural challenges facing free-to-air broadcasting (page 84).

 Broadcasters’ total spend on television output passed the £5bn mark, fuelled mostly by increased investment in Sport and Film channels (driven by higher costs for rights acquisitions) and BBC One (page 88).

 The five main PSB channels broadcast 33,165 hours of first-run originated programming in 2008, down by 3% on 2007 and by 5.6% (1,845 hours) since 2003. The five PSB channels also invested less in first-run originations. In 2008 prices, they spent £2.6bn in 2008, down by 2.9% year on year (page 90).

 UK television channels broadcast nearly 2.5 million hours of programming in 2008. Of these, almost 1.5 million hours were broadcast by the PSB channels and key multichannel genres, of which 9% (133k hours) were first-run originations (page 89).

 The five main PSB channels (BBC One, BBC Two, ITV1, Channel 4 and Five) attracted a viewing share of 60.8% in all homes during 2008, down by 2.7 percentage points year on year (page 130).

 Digital television penetration in the UK reached 89.2% at the end of Q1 2009, an increase of 2.1 percentage points year on year. This meant that around 22.8 million homes received digital television on their main set at the end of March 2009 (pages 73 and 121).

 Digital switchover is now well under way and Exeter in the West Country became the UK’s first ‘digital city’ in May 2009. Analogue switchover in the first region of the Scottish Borders was completed in November 2008 (page 74).

 High-definition television gained traction over the past 12 months, as new HD channels launched and more platforms developed their HD propositions. By the end of the first quarter of 2009, 2.3 million homes (9%) had reception equipment capable of accessing linear or on-demand HD content. Thirty-three per cent of UK homes claimed to have HD-ready television sets at the end of 2008, according to our research (page 76).

 A total of 77 television channel licences were issued by Ofcom in 2008, significantly down from the 143 issued during 2007. Overseas licences formed an increasingly large proportion of the new licences (page 79). There were 495 channels broadcasting in the UK at the end of 2008, up from 470 a year earlier.

6 Key points: radio

 Total UK radio industry funding stood at £1.15bn in 2008, down by 2.3% on 2007. This followed a fall in commercial revenues of 3.3% to £505m and we estimate that the BBC reduced its radio spend by 1.5% to £643m (accounting for a 56% share of all radio income/spend) (page 160).

 By Q1 2009, digital radio platforms attracted just over a fifth of all radio listening hours (20.1%), up from 17.8% in Q1 2008, according to RAJAR figures. The majority (63%) of digital listening came via DAB, which accounted for 12.7% of all radio listening. Digital television delivered a further 3.4% and the internet 2.2% (page 150).

 Radio audience reach was down by one percentage point in 2008 on five years previously, at 89.5% of adults. Time spent listening to the radio was also down, by 5% in five years, and by 1.7% year on year. Total listening hours to all BBC Radio stations were down by 0.5% during 2008 but still up modestly (0.2%) since 2003. By contrast, all commercial radio listener hours were down both by 3.2% in the year and 11.4% over five years (page 181).

 Within this overall pattern of reductions, listening to national radio stations has risen, while local radio listening hours have contracted. BBC network radio listening hours have risen by 6.4% in five years and national commercial hours are up 16.9%, although down on the past year. By comparison, local BBC station hours fell by 19.1% and local commercial by 18.3% (page 183).

 The decline in radio listening has been most notable among younger listeners, with hours falling by 21% among 4-15 year olds between 2003 and 2008. The reduction in hours grew progressively lower as the age of the audience increased. Among younger adults (15-24), hours were down 12.0%; among 25-34s they were down 11.1%. Listening among older age groups was more stable; down by 1.7% among listeners aged 55+, while hours were flat among 45-54 year olds (page 183).

 Cumulative sales of DAB digital radio sets passed 9 million by Q1 2009 (up from almost 7 million in Q1 2008), following sales of around 2 million in the previous 12 months. RAJAR estimates that almost a third (32%) of UK adults owned a DAB set by the end of Q1 2009, up by five percentage points on the previous year (page 151).

 A third of adults (33%) had listened to the radio online, according to the RAJAR internet and audio services survey carried out in May 2009. This was up from 29% a year previously and from 24% six months before that (page 151).

 In June 2009, the Government’s Digital Britain report was published, recommending the digital migration of the majority of radio services in the UK, with a proposed target of 2015. It specified an interim 2013 milestone of 50% of all radio listening to be through a digital platform, and targets for national DAB coverage to be comparable to FM and for car manufacturers to be installing DAB sets as standard (page 155).

 Twenty-one new community radio licences were awarded in the six months to June 2009, covering a number of regions in England including the Midlands, the North West, the East and the South East. By July 2009, Ofcom had awarded a total of 205 community radio licences, with 141 stations already on air. Licences are still to be awarded for community stations in Greater London and areas within the M25, within the current second round of licensing (page 172).

7 Key points: telecoms

 For the first time since Oftel started to collect market data in 1992/93, operator-reported revenues from telecoms services did not increase in 2008. Total revenues were unchanged at £39.5bn, with increasing retail revenues being offset by falling wholesale revenues (page 222).

 Telecoms services accounted for 3.2% of total household expenditure in 2008, down from 3.4% in 2007. Telecoms spend fell by 5.2% in real terms over the year, the largest annual decline since spend on telecoms services began to fall in 2006 (page 242).

 Nearly two-thirds (65%) of UK households had a fixed-line broadband connection in Q1 2009, up from 58% a year previously (page 247).

 Mobile broadband has continued to grow, with take-up of pre-pay services contributing to over a quarter of a million new connections in May 2009 alone. Around 12% of UK households had a mobile broadband connection in Q1 2009; three-quarters of these also had a fixed-line broadband connection, indicating that for many mobile broadband is a complement to, rather than a substitute for, a fixed-line service (page 208).

 Eleven per cent of households had a mobile connection but no fixed-line connection in Q1 2009 (unchanged from a year previously). However, 22% of households in socio- economic group DE are mobile-only (page 248).

 Mobile use continues to grow. The number of monthly outbound minutes per mobile connection increased by 6%, to 123 minutes, while the number of text messages increased by 29% to an average of 99 messages per month from each mobile connection (page 253).

 For the first time, the number of pre-pay (pay-as-you-go) mobile connections fell during 2008. This was driven by the availability of low-cost contracts, including SIM-only tariffs which accounted for nearly a quarter of new contract sales in the first five months of 2009. Thirty-two per cent of mobile contracts sold in Q1 2009 were for tariffs of less than £20 per month, compared to 23% in Q1 2008 and just 5% in Q1 2007 (page 233).

 24-month mobile contracts emerged during 2008, accounting for 13% of new post-pay connections in Q1 2009, compared to 2% a year previously. At the other end of the scale, 24% of new contracts were for just one month in Q1 2009 (driven by the take-up of SIM-only tariffs), up from 10% in Q1 2008 and less than 1% in Q1 2007 (page 217).

 More than 8 million people in the UK (16% of adults) accessed the internet on their mobile phone in Q1 2009, up by 42% on a year previously. This growth has in part been driven by the increasing use of smartphones, which accounted for 16% of all handset sales in Q1 2009, and the increasing use of mobile applications (page 209).

 BT’s share of retail fixed voice calls to UK geographic numbers fell to under 50% for the first time in 2008. Increasing use of wholesale line rental (WLR) and local loop unbundling (LLU) services contributed to the erosion of BT’s retail share (page 227).

 Overall satisfaction levels are high, with 90% or more of consumers satisfied with their fixed-voice, fixed-broadband and mobile services. However, satisfaction with the speed of fixed-line broadband connections has fallen from 90% in Q1 2006 to 81% in Q1 2009. (page 256).

8 Key points: converging markets

 Online catch-up TV began to enter the mainstream in 2008, largely thanks to the growing popularity of the BBC iPlayer. Twenty-three per cent of households claim to watch programmes online, rising to 33% among 15-24s. But 10% of people aged 65+ reported that someone in their household watched catch-up TV online (page 265).

 The BBC’s iPlayer served up 275 million online video streams (750,000 streams per day) in 2008, and a further 100 million over Virgin Media’s network. Channel 4 delivered nearly 150 million streams during the same period. All major broadcasters now have similar offerings (page 270).

 A quarter of the population admitted to the unauthorised sharing of music online according to data from Entertainment Media Research, and 5% admitted to doing so regularly. However, most unauthorised sharing is done by copying physical discs – 37% have let someone else copy a CD. Younger people seem less concerned about obtaining content for free – 66% believe it is morally acceptable to do so (page 275).

 Social networking is growing more slowly than previously. Facebook cemented its position as the most used site, growing by 73% since May 2008 to reach a monthly unique audience of 19 million, compared to 5 million for MySpace and 4 million for Bebo. But new services are still growing fast – Twitter now has 2.6 million unique users, up from 150,000 in May 2009 (page 289).

 Social networking is also maturing - literally. Use grew fastest among 35-54s – up by eight percentage points since Q1 2008 to 35%. Among 25-34 year olds use grew by six percentage points to 46% but it actually fell slightly among 15-24s – by five percentage points to 50% (page 289).

 The free ad-supported streaming service Spotify has made its mark in online music – the average user now spends over two hours per month browsing and searching for music through Spotify. This is ahead of established music applications with much larger audiences such as iTunes (just under two hours) and Windows Media Player (just under an hour) (page 282).

 Older consumers are increasingly adopting digital platforms. Since 2008 take-up of mobile phones, digital TV, DAB radio and the internet grew by double digits among consumers aged 65+. Seventy-seven per cent now have digital TV, 68% have a mobile phone, 41% have the internet and 28% a DAB digital radio set (page 305).

 Only a minority of people use advanced functions on their mobile phone handsets. Apart from text messaging (83%) and voicemail (56%), the only other function used by the majority of mobile phone users was taking and storing photos (52%) (page 310).

 Internet advertising spend grew to reach £3.3bn in 2008. For the first time, in 2008 the internet accounted for over one in every five pounds (20%) of UK advertising spend. The internet’s share has grown by 17 percentage points since 2003, with nearly half this growth at the expense of newspapers (page 295).

The Communications Market 2009

1 The market in context

11 Contents

1.1 Introduction and structure 13 1.2 Key market trends 14 1.2.1 Introduction, structure and findings 14 1.2.2 Availability: little change as many services approach near-universal coverage 14 1.2.3 Fixed broadband take-up rose by seven percentage points to 65% of homes in 2008 16 1.2.4 Communications industry revenue grew by just 0.2% to £51.8bn 16 1.2.5 Average household spend on communications services falls 17 1.2.6 Consumers are spending growing amounts of time on the internet 18 1.2.7 Satisfaction with communications services remains high 18 1.2.8 More consumers are buying bundles 19 1.2.9 Attitudes to media consumption 20 1.3 Communications markets and the recession 23 1.3.1 Introduction, structure and key findings 23 1.3.2 Economic trends and consumer attitudes towards the downturn 24 1.3.3 Consumers’ response to the economic downturn 25 1.3.4 The recession and communications service providers 32 1.3.5 Advertising revenues fall while broadcasters implement cost control measures 34 1.3.6 Telecoms players look to longer contracts as pre-pay subscriptions fall 36 1.4 Consumers embrace DVRs 39 1.4.1 Introduction, structure and key findings 39 1.4.2 More than a quarter of homes have a DVR 40 1.4.3 DVR use varies by age, platform and channel 42 1.4.4 Films and HD channels prove popular for recording 45 1.4.5 Drama series attract more recorded than live viewing in Sky+ homes 48 1.4.6 Three-quarters of viewers claim to fast-forward most adverts 49 1.4.7 DVRs users watch more television that they enjoy 51 1.4.8 DVRs are adding greater functionality and storage 51 1.4.9 Hard disks: bigger and cheaper 52 1.5 The nations’ communications markets 54 1.5.1 Introduction, structure and findings 54 1.5.2 The availability of communications services across the UK 55 1.5.3 Device and service take-up across the UK’s nations 56 1.5.4 Communications service bundling 58 1.5.5 Production of broadcast-based content across the UK 59 1.5.6 Consumption of broadcast services in the UK’s nations 60

12 1.1 Introduction and structure

This section of the Communications Market Report 2009 summarises a range of communications market developments over the last twelve months. It is organised into four sections:

 Key market trends (page 14) This section summarises developments in communications services availability and take-up. It then sets out industry revenue trends and household spend on communications services before concluding with consumer satisfaction metrics and consumers’ propensity to bundle services together.

 Communications markets and the recession (Section 1.3, page 23) The UK moved into recession in the final quarter of 2008, and its impact is being felt by consumers and industry. In this context, we commissioned research to understand the degree to which consumers’ attitudes towards communications services are being influenced by the recession. We also explore how industry revenues have fared over the last twelve months, and the steps that companies have taken to control costs.

 Consumers’ use of digital video recorders (DVR) (Section 1.4 page 39) The advent of the DVR - also known as a personal video recorder (PVR) or digital television recorder (DTR) – has offered consumers greater convenience and control over their television viewing than was available through analogue video cassette recorders (VCR). Now in more than a quarter of UK homes, consumers have embraced DVRs across a range of digital television platforms. Here we set out key metrics on the take-up and use of DVR products and identify trends in consumer attitudes towards DVR use.

 The nations’ communications markets (Section 1.5, page 54) Ofcom has published four nations’ Communications Market Reports alongside this report. As national or regional issues become more prominent in communications policy development (for example, the future of public service broadcasting and the Government’s proposed universal availability of 2Mbit/s broadband), so the characteristics of service availability, take-up and consumption by nation grow in importance. In this section we provide a short summary of the findings of CMR: Nations reports1.

1 See http://www.ofcom.org.uk/research/cm/cmrnr09/

13 1.2 Key market trends

1.2.1 Introduction, structure and findings

Introduction

This section provides an overview of key trends in the UK communications market in the year to the first quarter of 2009. We begin by looking at service availability and consumer take-up. We then turn to industry revenue and consumer spending before concluding by examining consumption of different communications services and consumers’ satisfaction with those services.

Structure and findings

 The availability of most communications services has remained largely unchanged year on year – but local loop unbundling is now available to 84% of consumers, up by four percentage points year on year. Fixed broadband penetration rose by seven percentage points year on year to 65%. Section 1.2.2 (page 14).

 Communications industry revenue grew by 0.2% £51.8bn. Television revenue was up in 2008 by 1.3%; telecoms revenue was flat but radio contracted by 2.3% over the year. Section 1.2.4 (page 16)

 Real household monthly spend on communications fell again in 2008, by 4.5% to £93.69. Section 1.2.5 (page 17)

 UK consumers spent an average of 25 minutes per day using the internet in May 2009, up from nine minutes in May 2004. Section 1.2.6 (page 18)

 Satisfaction levels rose for most communications services over 2008. For broadband it was up by one percentage points to 90%; for fixed-line voice it rose by four percentage points to 92% while satisfaction with mobile services satisfaction was 94% (flat year on year). Section 1.2.7 (page 18)

 The number of UK homes buying communications services as part of bundles increased in 2008. Section 1.2.8 (page 19)

 Just over half of consumers (51%) claim that watching television is the media activity that they would miss most. Section 1.2.9 (page 20)

1.2.2 Availability: little change as many services approach near-universal coverage

Coverage of key communications services remained largely unchanged in 2008 following marked increases in the availability of 3G mobile and local loop unbundling (LLU) during 2007. Of the key communications services that are tracked by Ofcom (Figure 1.1), only LLU availability rose during 2008.

For broadband, as availability reaches near-universal levels, the focus of service providers has now shifted to the speed of the broadband connection. The industry is working on offering consumers ‘super fast’ broadband, while the Government’s Digital Britain report included the objective of delivering minimum broadband speeds of 2Mbit/s by 2012.

Key developments in availability include:

• moves to increase the speed of broadband connections. Super-fast broadband was made available to some UK homes for the first time in 2008, as operators responded to demand for higher-bandwidth products:

o Virgin Media deployed ‘up to’ 50Mbit/s fibre-based broadband. By July 2009, 50Mbit/s broadband was available to 12.5 million homes, up from 5 million at the end of 2008. The company is also piloting speeds of 200Mbit/s.

o BT announced plans to make its super-fast broadband available to 40% of the UK, around 10 million homes, by 2012, at a cost of £1.5bn2 and covering 1.5 million homes by the summer of 2010.

o Within this context, Ofcom has consulted with industry on how to promote investment and competition in super-fast broadband.

o The Government’s Digital Britain report, published in June 2009, announced proposals to add 50p per month to the cost of fixed telephone line rental to create a fund for super-fast broadband. If implemented, the scheme would aim to see super-fast broadband made available to 90% of UK homes by 2017.

• Local loop unbundling (LLU) availability increased by four percentage points to reach 84% of UK households. LLU allows competing telecoms providers to install their own equipment in telephone exchanges, connect consumers to their own network and then offer services such as fixed telephony, DSL broadband and IPTV to end-users.

Figure 1.1 Digital communications service availability, 2007 and 2008

UK-wide Platform 2008 2007 Change England Scotland Wales N Ireland Fixed line 100% 100% 0% 100% 100% 100% 100% 2G mobile1 98% -- 99% 89% 92% 92% 3G mobile2 87% -- 91% 67% 67% 43% DSL3 99.6% 99.6% 0.0% ---- Cable broadband4 49% 49% 0% 53% 38% 24% 30% LLU5 84% 80% 4% 87% 70% 76% 71% IPTV6 39% 39% 0% ---- Digital satellite TV 98% 98% 0% ---- Digital terrestrial TV7 73% 73% 0% 73% 82% 57% 58% DAB digital radio8 90% 90% 0% n/a n/a n/a n/a Sources: Ofcom and: 1. Proportion of population living in postal districts where at least one operator reports at least 90% 2G area coverage. Sourced from GSM Association / Europa Technologies 2. Proportion of population living in postal districts where at least one operator reports at least 90% 3G area coverage. Sourced from GSM Association / Europa Technologies 3. Proportion of premises able to receive DSL services based on data reported by BT 4. Proportion of households passed by Virgin Media’s broadband-enabled network 5. Proportion of households connected to an LLU-enabled exchange 6. IPTV availability figure calculated on the assumption that Tiscali TV is now available in a number of areas including London, Stevenage, Birmingham, Newcastle and Edinburgh 7. Availability of services from all six digital multiplexes

2 http://www.btplc.com/news/Articles/ShowArticle.cfm?ArticleID=EFD7B1FA-52ED-45BB-B530- 734FAC577E94

15 8. DAB digital radio coverage figure based on a BBC/Digital One estimate. Both the BBC and Digital One built new transmission masts during 2006/07

1.2.3 Fixed broadband take-up rose by seven percentage points to 65% of homes in 2008

Broadband take-up continued to grow in 2008. Ofcom research found that 65% of UK households had a fixed broadband connection at the end of Q1 2009, an increase of seven percentage points year on year. The total number of UK fixed broadband connections increased by 10.7% to 17.3 million during 2008, up by 1.7 million on 2007. The number of LLU DSL broadband connections increased by 47.6% to reach 5.5 million at the end of 2008.

Take-up of mobile broadband also grew substantially over the year. Around 3 million homes had a mobile broadband connection (equivalent to 12% of the population) by the end of Q1 2009 and according to point-of-sale data from GfK there were over 250,000 mobile broadband sales in May 2009 alone (compared to 139,000 in May 2008).

By contrast, digital television penetration on main sets reached 89.2% (22.8 million households) in Q1 2009, up by 2.1% year on year – a comparatively small rate of growth compared to earlier years. Take-up was as high as 95% of individuals in Derby and Swansea, but as low as 71% in Glasgow and Derry/Londonderry.

Increasing numbers of consumers are acquiring digital video recorders (DVR), which are now installed in 27% of UK homes. Moreover, the number of homes with access to high- definition TV channels more than doubled in the year to Q1 2009 to reach 1.9 million, up from 829,000 a year earlier.

Figure 1.2 Digital technology adoption, Q1 2008 and Q1 2009

Fixed line Mobile 87% 89% 100 Fixed broadband 65% Digital TV 75 89%

Mobile 50 DVR broadband Games (%) 12% 27% console 25 Blu-ray / 47% HDTV HD DVD Q1 2008 channels 11% DAB digital

Proportionindividuals of Q1 2009 0 7% 3G radio 32% 22% Innovators Early Early Late Late adopters majority majority adopters Source: Ofcom research and operator data Notes: All figures relate to Q1 2009; all figures are measured as a proportion of individuals except for 3G, which represents the proportion of mobile subscribers and DTV, which represents the proportion of homes with a digital television reception device on the main set.

1.2.4 Communications industry revenue grew by just 0.2% to £51.8bn

The impact of the economic downturn was felt by companies across the communications sectors in 2008. Overall revenues climbed by just 0.2% year on year to a little under £52bn. A 2.3% fall in radio revenue of £0.1bn to £1.1bn was offset by rising TV revenue, which grew by 1.3% to £11.2bn over the same period. Increased television revenue was largely driven

by subscriptions, up 5.7% in 2008 to reach £4.3bn, while net advertising revenue decreased by 2.9% to £3.5bn.Telecoms revenue was flat in 2008 at £39.5bn (Figure 1.3). Figure 1.3 Communications industry revenue

60 1 year 5 year 51.7 51.8 49.0 49.9 growth CAGR 48.0 1.2 1.1 44.7 1.2 1.1 1.2 11.1 11.2 1.1 10.0 10.5 10.6 Total 0.2% 3.0% 40 9.2

Radio -2.3% 0.4% 20 39.5 39.5 34.4 36.8 37.4 38.2 39.5 39.5 TV 1.3% 4.1% Revenue (£bn) Revenue (£bn)

0 Telecoms 0.0% 2.8% 2003 2004 2005 2006 2007 2008

Source: Ofcom/operators Note: Includes licence fee allocation for radio and TV

1.2.5 Average household spend on communications services falls

Over the year, consumers once again found their monthly household spend on communications services falling. In real terms, UK household average spend was £93.69 a month, down 4.7% or £4.39 on 2007, marking the largest annual fall since Ofcom began tracking the market (Figure 1.4). All communications services saw decreases in monthly household spend, but spend on internet subscriptions fell furthest in proportional terms, down by 6.2% to £10.71, despite increasing take-up. Spend on fixed-line voice decreased by 5.3% to £22.263.

Monthly spend on communications accounted for 4.63% of total household spend, down from 4.79% in 2007 but up from 4.49% in 2003.

Figure 1.4 Average monthly household spend on communications services

150 6% Total comms 4.72% 4.75% 4.72% 4.79% 4.49% 4.63% £101.52 Radio £95.80 £100.54 £98.85 £98.08 100 2.35 2.34 £93.69 4% 2.37 2.20 2.60 2.44 26.35 26.97 TV 25.71 26.57 26.64 26.24 7.25 9.22 10.69 11.53 11.37 10.71 Internet & 50 29.13 33.51 34.88 2% broadband 33.66 33.98 32.04

As% of total spend Mobile voice & text 31.34 29.11 26.64 24.90 £ per monthper (2008 prices)£ 23.49 22.26 0 0% As a %age of total 2003 2004 2005 2006 2007 2008 household spend Source: Ofcom/operators

3 It should be noted that in order to reflect these changes in household spend in real terms they have been inflation-adjusted, using the consumer price index (CPI) which increased 3.6% during 2008. The number of UK households also increased by 1.2% during 2008. This explains why average spend per household fell in 2008 even while there was a small increase in overall industry revenues.

1.2.6 Consumers are spending growing amounts of time on the internet

The shifting pattern of communications service consumption which we have highlighted in previous years continued into 2008. Figure 1.5 shows the amount of time consumers spent per day using communications services in 2003 and 2008. Radio listening experienced the steepest decline in usage, down by 17 minutes year on year to 172 minutes in 2008; TV television viewing levels actually rose modestly over by one minute to 225 minutes per day. Mobile telephony and home internet use (including web and applications) both experienced the largest increases in average daily use (15% and 22% respectively)

Figure 1.5 Average time per day spent using communications services

0.1% -1.9% 21.5% -3.4% 15.2% 5 year CAGR 250 224 225 189 200 172 150 2003

100 2008 50 25 9 15 13 6 11 Minutes per person per day personper perMinutes Minutes per person per da personper perMinutes 0 Television Radio Internet Fixed Mobile

Source: Ofcom / BARB / RAJAR / Neilsen Netratings (home use only) Note: Daily figures were calculated from monthly data on the assumption that there are 30.4 days in the average month; the exception was for internet consumption where the quoted figures relate to May 2004 and May 2009, and 31 days were used; the internet consumption figures include the use of online applications such as streaming media and only include use at home; mobile telephony figures are estimated assuming that the average time taken to send and receive a text message is 35 seconds.

1.2.7 Satisfaction with communications services remains high

Consumer satisfaction with communications services remained high across all five communications services in 2008:

• Mobile telephony scored highest out of the five communications services, with 94% of consumers either ‘satisfied’ or ‘very satisfied’ with their service.

• Digital television experienced the most marked decline in satisfaction, down by five percentage points to 85% of consumers being either ‘satisfied’ or ‘very satisfied’.

• Mobile broadband – included in our research for the first time – attracted the lowest satisfaction rating of all the communications services that we surveyed (83%).

18 Figure 1.6 Overall satisfaction with communications services

Source: Ofcom research, Q1 2009 Note: Shows the proportion of users with each service, includes only those who expressed an opinion.

1.2.8 More consumers are buying bundles

A wide range of suppliers now offer consumers services in ‘bundles’, in which two or more products are supplied by the same provider. This often offers the advantage of a price discount and the convenience of receiving a single bill for several services. Figure 1.7 shows the bundled services available from major suppliers in the UK.

Figure 1.7 Bundled service offers from major suppliers

Source: Pure Pricing, June 2009 Note: Highlighted box denotes that the combination of services requires the purchase of additional services.

Ofcom research shows that the number of households taking bundled services rose by seven percentage points in the 12 months to Q1 2009 to reach 46%. The great majority of these bundles were either fixed voice and broadband ‘double play’ (44%) or fixed voice,

19 broadband and multichannel TV ‘triple play’ (34%). Take-up of bundles was as high as 68% of individuals in Bristol, to 62% in Newport, 56% in Edinburgh and 46% in Belfast.

Figure 1.8 Bundled services by consumer, by type

29% 31% 29% 35% 40% 39% 46%

Source: Ofcom research, Q1 2009 Note: A bundled service is defined as two or more services taken from a single provider, with or without a price discount.

1.2.9 Attitudes to media consumption

Just over half of consumers (51%) claim that watching television is the media activity that they would miss most, a similar figure to 2007. The number of people citing most other media activities has declined slightly since 2007 or stayed the same. One notable exception was use of the internet, which rose by three percentage points to 15%, a statistically significant change, to become the second media activity that would be missed the most. Mobile phone use fell four percentage points, also a statistically significant change, and is now the third most-missed media activity.

Listening to the radio, and listening to music on both traditional and digital platforms among 16-24s has declined dramatically between 2005 and 2009 as the most-missed media activity. Listening to music on a hi-fi/CD or tape player has fallen from 18% in 2005 to 0% in 2009 (a statistically significant change). This preference change has not been substituted by music listening on a digital device, but instead by television watching, which is now the most missed-media activity for this demographic. Listening to music on a hi-fi/CD or tape player has also declined as the most-missed media activity among 25-34s. This age group also express a statistically significant increase in missing console and computer gaming the most.

20 Figure 1.9 Which media activity would consumers miss the most

Watch videos/DVDs 100% 1% 1% 1% 2% 2% 2% 2% 3% 3% 3% 3% 1% 2% 1% 2% 6% 3% 5% 2% 7% 4% 3% 4% 3% 3% 1% 1% 4% 6% 5% 13% 5% 4% 2% 0% Listen to a portable 6% 0% 14% 2% 2% 0% music device/MP3 8% 8% 2% 4% 3% 80% 18% 4% player 6% 2% Play 9% 24% 7% 13% 1% 18% 14% console/computer 12% games 7% 33% Listen to music on a 60% 15% 14% 10% 12% hi-fi/CD or tape 14% player 20% 19% 8% 28% 11% Read newspapers/ magazines

40% 21% Listen to the radio

11% 52% 51% 44% 47% Use a mobile phone 20% 39% 41% 40% 28% 22% Use the internet via computer/laptop

0% Watch television 2005 2007 2009 2005 2007 2009 2005 2007 2009 All adults All adults All adults 16-24 16-24 16-24 25-34 25-34 25-34 A2 – Which one of these would you miss doing the most? Base: All adults aged 16+ (3244 in 2005, 2905 in 2007, 812 in 2009), adults aged 16-24 (530 in 2005, 413 in 2007, 106 in 2009), adults aged 25-34 (604 in 2005, 473 in 2007, 126 in 2009). Circles show statistically significant change between 2007 and 2009. Source: Ofcom research, fieldwork carried out by Saville Rossiter-Base in April to May 2009

Consumers’ age affects the types of activities that they use the internet for. Our research looked at a selection of convergent activities that people can use the internet for (Figure 1.9). It found that nearly all the activities were most popular among consumers aged 15-24, however, listening to the radio online was only marginally more popular among 15-24s (21%) than among those with internet at home generally (17%).

The only group in which more than half engaged in any of the mentioned activities (online gaming, downloading content files and watching video) was 15-24 year olds. Overall, playing games online and watching TV programmes online both rose over the past year, by an average of three percentage points. Growth rates for both online viewing and downloading content were more mixed, although both rose strongly among the 45-64 age group.

But some online activities became less popular in 2009. There was less reported content downloading among younger age groups, and internet radio listening fell among all age groups to reach an average of just 17% of all consumers, down three percentage points year on year.

21 Figure 1.10 Proportion of households using the internet for listed activities

% of households who use the internet for the following activities Increase in activities since Q1 2008 (percentage points)

33 42 -2 -1 -8 -5 4 0 34 33 0 -3 -3 -5 -1 -1 2 0 14 -4 19 1 2-3

60% 53% 51% 51% 50% 42% 42% 38% 39% 40% 35% 31% 30% 31% 32% 31% 30% 25% 21% 19% 19% 18% 19% 20% 16% 17% 17%17% 15% 13% 9% 10% 10% 7% 7% 5%

0% Playing games Downloading music Watching TV Listening to the Watching video Uploading/ adding online/interactively files, movies or programmes radio clips/webcasts content video clips All 15-24 25-44 45-64 65+ Base: All adults who have the internet at home (n= 3858) Source: Ofcom research, Q1 2009

22 1.3 Communications markets and the recession

1.3.1 Introduction, structure and key findings

Introduction

Since the last Communications Market Report was published in August 2008, the UK economy has moved into recession4.The effects of the economic downturn have been felt by a range of UK’s communications industry operators – particularly in the free-to-view broadcasting sector, as advertisers have trimmed their spend or while others have moved resources into the internet. This is reflected in the annual operator data that Ofcom collects from broadcasters.

This section explores the impact that the downturn is having, both on consumers and on communications market operators.

Structure

 Section 1.3.2 (page 24) sets out the UK’s macro-economic trends during 2008/09, including quarterly GDP growth, Bank of England base rates and levels of unemployment. It also examines consumer attitudes towards the recession.

 Section 1.3.3 (page 25) details the findings of an omnibus survey we commissioned into how consumers’ attitudes towards communications services are being influenced by the economic downturn; and

 Section 1.3.4 (page 32) concludes by exploring how industry revenues have fared over the last twelve months, and the steps that operators have taken to control costs.

Findings

The key findings of this section include:

 There is a wide spectrum of attitudes towards the recession: many people appear to be unconcerned by its implications for them personally, but an equal number are worried about its impact (page 25).

 Consumers see opportunities to save money… people seem to see opportunities to save on their communications spending – for example, by bundling services (page 28) or by deferring mobile handset purchases (page 29). There is also evidence of polarisation in the types of mobile contract customer – with a growing proportion opting for month-long SIM-only contracts (page 37).

 …and some are more likely now to shop around for communications services. Some consumers are more conscious of their communications spending now than they were a year ago (page 30); some think that providers offer better deals now

4 http://www.statistics.gov.uk/elmr/02_09/downloads/ELMR_Feb09.pdf

23 (page 31); and the recession is motivating some to shop around more for the best deal on communications services (page 32).

 Declining advertising revenue has had an impact on the broadcasting industries. Advertising expenditure is known to be cyclical, and this is borne out in the latest revenue data from broadcasters. Radio industry revenue contracted year on year, and while overall television advertising revenue rose, the commercial PSBs attracted less advertising revenue this year than last (page 34).

 Fixed-mobile substitution continues to have the greatest bearing on telecoms industry revenue. While it is less clear that the telecoms industries have been affected by the economic downturn, mobile and broadband operators are affected by the competitive pressures of markets approaching saturation, and the increasing use of mobile phones rather than fixed-line phones is putting pressure on fixed-line operators (page 34).

1.3.2 Economic trends and consumer attitudes towards the downturn

In the last 12 months the UK economy has moved into recession. GDP declined in Q2 2008 and the economy has continued to contract since then. Concurrently, Bank of England base rates have fallen, from an average of 5.4% in the first quarter of 2008 to an average of 1.1% in Q1 2009, and to an all-time low of 0.5% on 5th March 2009. At the same time, unemployment rose by nearly 40% from 1.6 million in Q1 2008 to 2.2 million in Q1 2009 (Figure 1.11).

Figure 1.11 UK GDP quarterly growth, Bank of England base rates and unemployment

Quarter-on-quarter GDP growth (%)

0.8% -0.1% -0.7% -1.8% -2.4%

2.5m 5.4% 6% 2.2m 5.0% 5.0% 2.0m 5% 2m 1.8m Unemployment 1.6m 1.7m 4% 1.5m 3% 3.4% 1m 2% Quarterly average base rates 0.5m 1% 1.1% 0m 0% Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009

Source: Office for National Statistics and The Bank of England

Our research suggests that consumer attitudes towards the downturn are evenly distributed between those who have concerns about its impact on them personally, and those who have few personal worries. A range of factors may explain why so many people appear unconcerned – but historically low interest rates may have resulted in those in employment who are also owner-occupiers discovering that they are better off now than they were a year ago.

Thirteen per cent of people claimed that they were ‘extremely’ worried about the recession, while a fifth claimed that they were ‘not at all’ worried. In between these extremes 40% rated their attitude to the recession as a ‘4’ (where 5 represented ‘extremely worried’) while 42% ranked it as a ‘2’ or ‘3’ (where 1 represented ‘not at all worried’).

24 Figure 1.12 Consumer attitudes towards the recession On a scale of 1 to 5, where 5 is ‘extremely worried’ and 1 is ‘not at all worried’, how worried are you about being personally affected by the recession?

3% (Don't know) 13% - extremely 20% - not at all worried worried

5 - extremely 4 3 16% (2) 2 40% (4) 1 - not at all worried Don't know

32% (3)

Source: Ofcom-commissioned research Base: All respondents (n=2321)

1.3.3 Consumers’ response to the economic downturn

Spending on communications services appears relatively robust in the downturn

Consumers remain attached to their communications services, even in the face of more challenging economic circumstances. When selecting three products or services that they would cut first from their household budget, communications services were among the least likely to be chosen. Less than a fifth of consumers selected their mobile phone in their top three; that proportion fell to 16% for pay-TV, 10% for broadband and 10% for home phone calls. Only spending on groceries and toiletries/cosmetics were less popular responses.

This suggests that subscriber-based income sources, on which the mobile operators, fixed- line operators and pay-TV platform operators rely, may, for the moment at least, be well- placed to withstand the current downturn.

25 Figure 1.13 Items where consumers are most likely to cut back their spending Items mentioned as first, second or third choice (%)

Night/meals out 47% Holidays/weekends away 41% New furniture or home improvements 41%

Health club membership or sports 32% Music, books, DVDs 29% Clothing or footwear 25% Newspapers and magazines 20% Spend on mobile phone 19% Television subscriptions 16% Broadband subscription 10%

Home telephone calls 10% Household groceries 6% Personal care, toiletries, cosmetics 3%

0% 10% 20% 30% 40% 50%

Source: Ofcom-commissioned research Base: Those that have a landline, mobile phone, pay television and broadband (n=862) Question: If you were forced to cut back on spending, which of the following items would you be most likely to spend less on?

When forced to prioritise among communications services, consumers who had all four were most likely to cut back spending on their mobile phone; 43% of people in our survey chose their mobile, followed by spend on TV subscriptions (28%) then home phone calls (18%). Broadband was mentioned least frequently (12%).

The identification of the mobile phone as first choice does not necessarily imply that it is the service consumers would be most happy to do without – it may be connected with the perception that their mobile service is the one where the scope for reduced spending is greatest (e.g. by switching to a SIM-only or pay-as-you-go tariff).

26 Figure 1.14 The communications service where consumers would be most likely to cut spend Proportion of individuals selecting each communications service (%) 100% 12% 11% 12% 14% 22% Broadband 80% 18% 18% 19% 14% subscription 19% Home telephone 60% 28% calls 28% 30% 31% Television 25% 40% subscription Spend on mobile phone 20% 43% 43% 41% 38% 33%

0% UK England Scotland Wales N Ireland*

Source: Ofcom-commissioned research Base: Those with all four communications services (n= 862 for UK, n= 632 for England, n=84 for Scotland ; n=83 for Wales and n=63 for Northern Ireland).*Note small base size for Northern Ireland; results should be treated as indicative only. Question: Which ONE of the following would you be most likely to cut back spending on?

Communications service bundles looking more attractive to some consumers

Our research also examined changes in consumers’ attitudes towards three key decisions connected with their use of communications services:

 whether to take communications services in a bundle;

 whether to keep their existing mobile handset (rather than trading up); and

 whether to keep (or subscribe to) pay-TV, as an alternative to going out.

The research findings suggest that discounted bundles might take on added significance for some consumers in an economic downturn. Nearly half of people (47%) agreed that they were more likely now than 12 months ago to consider purchasing communications services in a bundle; only a quarter (26%) disagreed.

The margin between those agreeing and disagreeing was more pronounced among those who took all four communications services; two-thirds said they would be more likely to take discounted bundles. There was also a greater tendency to agree with this statement among those who were worried about the recession. That said, there was also heightened interest in discounted bundles among those who were not worried about the recession, so the downturn might be just one of a number of factors motivating consumers to take bundles.

27 Figure 1.15 Consumers’ agreement/disagreement that they were more likely, in the context of a recession, to take communications services in bundles Proportion of respondents agreeing or disagreeing (%)

Agree Disagree

80% 63 60% 55 47 44 40% 30 26 24 18 20%

0% Total sample Those with all four services Worried about the recession Not worried about the recession

Source: Ofcom-commissioned research Base: Total sample (n = 2321), those with all 4 services (862), worried about being personally affected by recession (689), not worried about being personally affected by recession (841) Question: I am now going to read out a number of statements other people have made about how the recession has changed their spend on TV, broadband, mobile and home phone services. For each tell me how much you agree or disagree.

Mobile handset upgrades are vulnerable to spending cuts

Seven in ten people agreed that they would be more likely now than 12 months ago to defer upgrading their mobile handset. Those on pay-as-you-go tariffs were slightly more likely (72%) to put off purchasing a new handset than those on pay-monthly contracts (67%).

Since the majority of mobile phone contracts are for 18 months or longer, it is possible that some of those in the sample would have no choice but to keep their current handset. Moreover, with most mobile users now having camera phones with internet browsing capabilities, it is possible that consumers may see less reason to change to a new model now than they would have done a year ago.

28 Figure 1.16 Consumers’ propensity to renew their handset now, compared to 12 months ago Proportion of respondents agreeing/disagreeing (%)

Agree Disagree

80% 72 70 67 60%

40%

17 20% 15 14

0% All those with a mobile Those with a monthly contract Those on a pay-as-you-go tariff Source: Ofcom-commissioned research. Base: those with mobile (1970), those on monthly contracts (840), those on PAYG (1360). Question: I’m more likely to put off purchasing a new mobile phone and will continue to use my existing handset.

These findings appear to be supported by the latest evidence on mobile handset sales. Sales in Q4 2008 and Q1 2009 were down on the corresponding quarters a year ago (9.5 versus 9.1 and 7.4 versus 7.6), although sales in these two quarters were still higher than they were two years ago. But there are complex market dynamics at play – for example, the handset market has been boosted by the popularity of smart phones such as the Apple iPhone.

Figure 1.17 UK sales of mobile handsets

10 8 6 9.5 8.8 8.6 9.1 4 7.6 7.6 7.9 7.4 6.4 6.6 6.3 6.5 6.1 6. 3 6.9 2 4.4 4.2

Handset sales (millions sales Handset 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2005 2006 2007 2008 2009 Source: GfK Retail and Technology Ltd. Based on factual point-of-sale information and representative of only general market statistics. All other comments, opinions and references made are not those of GfK. Notes: (1) England, Scotland and Wales only (excludes Northern Ireland); (2) based on GfK’s coverage of 94% of the market - data have been extrapolated to represent the whole of the UK; (3) only represents sales through consumer channels (i.e. most business connections are excluded).

Our research also explored consumers’ views on pay television – specifically that it may grow in importance during the recession as an alternative to nights out. Few of those who currently had only free TV services said that they were more inclined to take pay-TV now than they were a year ago. Even among those with basic-tier pay-TV, there were more people who disagreed than who agreed. But among those with premium-tier TV, a higher proportion of people agreed that they would be more likely to maintain their subscription than they would have been 12 months ago.

29 Figure 1.18 Increased likelihood of consumers keeping/taking out a pay-TV subscription now versus 12 months ago Proportion of respondents agreeing/disagreeing (%)

Agree Disagree 60% 52 50% 37 38 39 40% 36 35 34 30%

20% 15 10% 0% Those without pay TV Total pay TV Those with pay TV - basic Those with pay TV - channels premium channels

Source: Ofcom research Base: Those with pay TV (1188), those with premium channels (678), those with basic channels (547), those without pay-TV n = 1133. Question: I’m more likely to keep or take out a pay- TV subscription because I’m going out less often and can make better use of it

Heightened cost consciousness among some, prompting people to shop around

Despite the apparent robustness of communications spending in the economic downturn, consumers are more attuned to the cost of their communications services now than they were 12 months ago. Nearly four in ten (37%) agreed that they were more conscious of mobile spend; for fixed calls this figure fell to 27%, and to 25% for pay-TV. Just 15% believed that they were more conscious of their spending on broadband.

Figure 1.19 Proportion of consumers becoming more conscious over the last 12 months of their spending on a variety of communications services Proportion of respondents agreeing/disagreeing (%)

40% 37

30% 27 23

20% 15

10%

0% Mobile Home telephone calls TV subscription Broadband subscription

Source: Ofcom research Base: Those with each service, mobile (1970), home landline (1901), Pay-TV (1188), Broadband (1398). Question: In the last 12 months, have you become more conscious about your spend on any of the following services?

30 There was also recognition among some consumers that some communications service providers are offering better deals now than they were a year ago – but that view did not extend to all services. Around a quarter of our sample agreed with this statement for both mobile and broadband providers (26% and 24% respectively). That figure fell substantially to just 13% for fixed telephony and to 8% for pay-TV services. A quarter of consumers did not recognise any communications services provider as offering better deals now than a year ago.

Figure 1.20 Proportion of consumers agreeing that providers offer better deals now than a year ago Proportion of respondents agreeing/disagreeing (%)

30% 26 24 25 25%

20%

15% 13

10% 8

0% Mobile providers Broadband providers Home telephone Pay TV providers None of them providers Source: Ofcom research Base: Total sample 2321 Question: Which of the following providers, if any, do you think are offering better deals than they were 12 months ago?

The combination of the downturn and consumers’ concern to secure value for money from their communications services appears to extend most to mobile telephony products. Nearly one-third of people (29%) said they would be more inclined to shop around for their mobile phone services now than a year ago. They were least likely to say the same about their pay television service (11%). But nearly four in ten people said that they are no more likely now to shop around for any communications service product than they were 12 months ago. Across the UK nations, consumers’ tendency to claim they would shop around was highest in Scotland for mobile and broadband and in Northern Ireland for home telephone providers.

31 Figure 1.21 Consumers who are more likely to shop around for their communications service now than a year ago Proportion of respondents agreeing/disagreeing (%)

40% 38 35% 29 30% 25% 19 20% 14 15% 11 10% 5% 0% No services Mobile phone Broadband Home telephone Pay television

Source: Ofcom research Base: Total sample 2321 Question: Which of the following services, if any, are you more likely to shop around for than you were 12 months ago?

1.3.4 The recession and communications service providers

The media and telecoms sectors have both underperformed the FTSE 100 over the past year, in a period where the FTSE 100 itself was on a broadly downward trend until the end of 2008, with some signs of stabilisation since then.

Over this period the FTSE fell by 20%, prompted by a range of company closures including the demise of Lehman Brothers in September 2008.

Until December 2008, both the telecoms and media market indices fell concurrently, although investors marked down telecoms more severely than they did the media sector. Since then, the value of telecoms equities has continued to fall – with the index losing around 40% of its value by the end of June 2008 (while the FTSE 100 lost 20%) But the media index recovered ground in 2009, and was valued at 85% of its value in June 2008.

32 Figure 1.22 Media and telecoms share performance against FTSE 100

120

100 Media FTSE 100 80 Telecoms

Jul 08 Oct 08 Jan 09 Apr 09 Jun 09

Source: Yahoo! Finance UK & Ireland

Subscriber-based revenues stable, but advertising suffers

Revenue trends across the TV, telecoms and radio sectors are illustrated in Figure 1.23. Communications market revenue (as reported by operators to Ofcom and as estimated by Ofcom) reached £43bn in 2008, up by 0.5% in a year but well behind the five-year annualised average growth rate of 3.7%, and last year’s growth of 4.0%.

The extent to which income has risen year on year varied substantially by sector, and by the components of revenue within each sector:

 TV was the fastest-growing sector by revenue in 2008, up by 1.3% (although less than the 4.1% annualised average rate of growth).

 The telecoms sector expanded, by revenue, by 0.4% year on year, considerably below the five-year growth rate (3.7%).

 The radio industry revenue contracted by 2.5% year on year, compared to a five-year average growth rate of 0.4% per annum.

Figure 1.23 Revenue trends in the TV, telecoms and radio sectors

1 year 5yr CAGR

Total £36.1bn £39.1bn £40.6bn £41.5bn £43.1bn £43.3bn 0.5% 3.7%

£30.9bn £31.0bn £29.0bn £29.7bn 30 £28.0bn £25.8bn 0.4% 3.7% Telecoms

20 1.3% 4.1% TV

£10.5bn £10.6bn £11.1bn £11.2bn £9.2bn £10.0bn 10 -2.5% 0.4% Radio

£1.1bn £1.2bn £1.2bn £1.1bn £1.2bn £1.1bn 0 2003 2004 2005 2006 2007 2008

Source: Operators and Ofcom calculations

33 In the telecoms sector, the increasing use of mobile phones rather than fixed-line phones continued to have a significant bearing on revenue trends during 2008. The 0.4% (£117m) year-on-year increase was fuelled by substantial growth in mobile voice and data revenue (£185m and £112m respectively), offset somewhat by ongoing reductions in fixed voice revenue (-£266m). Mobile messaging and corporate data revenues rose by an additional £83m.

By contrast, the TV and radio sectors in 2008 found that cyclical pressures on advertising revenue brought to a halt the revenue growth that has characterised both industries in recent years (although growth in the radio industry had been relatively modest).

The TV industry expanded by 1.3% (£145m) year on year, fuelled principally by growing subscriber revenue. Advertising revenue fell by £105m, while we estimate that licence fee income allocated to television services contracted by an additional £31m.

In radio, sector revenue actually fell by 2.5% (-£29m) in 2008. As with television, the reduction was driven both by falling advertising revenue and by a reduction in the proportion of the total licence fee that is spent on radio services. However, this was not offset by any substantial alternative revenue source such as subscriptions (although sponsorship revenue did rise).

Figure 1.24 Proportional changes in sector revenues, 2007 - 2008

Telecoms Television Radio 2008 revenue £31.0bn £11.2bn £1.1bn Change YOY +£117m +£145 -£27m Net change (%) 0.4% 1.3% -2.3% 3 Net change: 1.3% 0.3 Other 2 Net change: 0.4% 1 0.3 Other 2.2 Subscriptions 0.4 Mobile data Net change: -2.3% 0.6 Mobile voice 0.6 Sponsorship 0 -0.9 Fixed voice -1.0 Advertising Advertising -1 -0.3 Licence fee -2.0

revenue points) (percentage -2 Licence fee

Drivers of Drivers the total change in sector -0.9 -3

Source: Operators and Ofcom calculations Note: Licence fee allocated to TV and radio fell between 2007 and 2008, based on figures reported in the BBC’s Annual Reports & Account; this came alongside a nominal rise in the cost of a licence fee.

1.3.5 Advertising revenues fall while broadcasters implement cost control measures

Figure 1.25 shows how the contraction in television advertising revenue was absorbed by the public service broadcasters (PSBs). The reduction was largest for ITV1/STV/UTV and for Channel 4, where revenues fell by 8.2% and 8.4% respectively during 2008. Five’s advertising revenue fell by 5.4% while GMTV’s rose by 1.3%. Multichannel revenue, by

34 contrast, rose by 6.6% over the period, reflecting the growing popularity of digital television platforms and the greater channel choice they offer.

Figure 1.25 Net advertising revenues among television broadcasters

£3,462m£3,576m £3,471m -2.9% 3,600 £54m £54m £287m £55m 3,200 £286m £272m 1.3% GMTV1 2,800 £667m £680m £623m 2,400 -5.4% Five

2,000 £1365m £1253m £1419m -8.4% Channel 4 1,600

1,200 -8.2% ITV1

Industry revenue(£m) 800 £1189m £1267m 6.6% Multi-channels 400 £1036m 0 2006 2007 2008

Source: Ofcom/Broadcasters Note: Totals may not equal the sum of the components due to rounding.

The drivers of broadcasters’ cost control measures are complex and can include cyclical factors such as an advertising downturn. But structural influences such as audience fragmentation and new editorial strategies can also have a bearing.

The UK’s biggest commercial broadcasters announced a range of cost-control initiatives during 2008/09, involving job losses, asset disposals and reductions in programming budgets

ITV said it would cut 600 jobs in March 2009, on top of 1,000 it announced in early 2008; Channel 4 headcount’s was reduced by more than a third to around 700, while commercial broadcaster Five announced that up to 87 jobs would be lost from the company’s 354-strong workforce. The BBC, while funded through the licence fee, also moved to cuts costs (see TV section).

While the multichannel sector’s claim on advertising revenue rose year on year, it concealed an unequal distribution of revenue growth between the PSB’s portfolio channels and other television channels. Of the £78m additional advertising revenue generated by the multichannels in 2008, £77m accrued to the PSBs’ portfolio services. For the commercial PSB groups, therefore, the £183m reduction in NAR on the main channels was offset by rising NAR on their portfolio services (Figure 1.26).

Concurrent with a relatively subdued year for the non-PSB multichannel sector, some channel groups took steps to control costs. A number of channels closed during 2008/09, while the major pay-TV platforms announced job cuts. The biggest casualty, in June 2009, was the UK business of Setanta Sports, which closed its subscription sports channels.

35 Figure 1.26 Multichannel NAR

Growth (%)

1 yr 4 yr CAGR £794m £863m £1,042m £1,188m £1,267m 6.3% 12.4% 100% £99m £168m £270m £380m 80% £457m 20% 47% PSB portfolio channels's NAR 60%

£695m 40% £695m 0.2% 3.9% Other £772m multichannel NAR £808m £810m

20%

0% 2004 2005 2006 2007 2008

Source: Ofcom/Broadcasters

Despite the impact of cyclical advertising revenue on the television and radio industries, they were more resilient than print media over the period. Newspaper advertising revenue fell by 12% year on year, while it contracted by 10% for magazines over the same period. The internet has been the beneficiary, although even its growth fell from a five-year average of 48% down to just over 17%.

Figure 1.27 Advertising spending, by sector

Advertising spend (£bn) CAGR (%) 07/08 5yr

£6bn -12.0 -3.3 Newspaper £5bn -4.9 0.5 Television 17.3 48.0 Internet £4bn -6.0 -3.7 Direct Mail £3bn -9.9 -2.9 Magazine

£2bn -3.8 3.6 Outdoor

£1bn -8.7 -2.9 Radio -1.2 2.4 £0bn Cinema 2003 2004 2005 2006 2007 2008

Source: Advertising Association statistics published by www.WARC.com Note: all figures are nominal.

1.3.6 Telecoms players look to longer contracts as pre-pay subscriptions fall

While the direct impact of the economic downturn is less easy to identify in the telecoms sector, it is nevertheless facing challenging structural changes that have had a bearing on revenue growth in 2008.

The UK’s fixed-line telephony market is in decline as use of mobiles and other forms of communication, such as email and instant messaging, increase. Moreover, in the mobile and

36 internet/broadband sectors, growth has slowed significantly as markets approach saturation and competitive pressure reduces prices.

With consumers more likely to switch provider as they seek the best deal, mobile operators have given increasing emphasis to customer retention. This has resulted in more attractive deals offered to customers who sign up for longer-term contracts, and has produced a marked shift away from 12-month contracts towards contracts of 18 and 24 months (Figure 1.28). At the same time, consumers are also increasingly taking advantage of low commitment one-month contracts. These are typically SIM-only tariffs, which allow mobile operators to reduce subscriber acquisition costs as there is no need to subsidise handsets.

Figure 1.28 Post-pay mobile sales, by length of contract

100 111 1111 1 1 12 12 24 357 13 24 27 Other 80 41 55 24 months 66 74 68 60 80 84 82 75 72 67 63 60 88 88 18 months 40 76 72 58 5 44 12 8 3 12 months 20 33 11 13 25 19 19 24 24 16 15 13 10 15 0 2 1 month Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

Share of contract sales (per cent) (per sales contract of Share 2005 2006 2007 2008 2009 Source: GfK Retail and Technology Ltd, based on factual point-of-sale information Notes: (1) England, Scotland and Wales only (excludes Northern Ireland); (2) based on GfK’s coverage of 94% of the consumer market; (3) based on new post-pay connections; (4) excludes contract renewals; (5) only represents sales through consumer channels (i.e. most business connections are excluded)

Mobile operators have also sought to migrate pre-pay (pay-as-you-go) customers to post- pay (pay monthly) contracts as part of their customer retention strategies, by introducing cheaper tariffs. For the first time in 2008, sub-£10 a month contract tariffs were launched, while in Q1 2009 32% of new pay-monthly tariffs were under £20 a month, up from 23% in Q1 2008 and 5% in Q1 2007. The popularity of such offers is reflected in a fall, for the first time, of pre-pay subscriptions in 2008, while the rate of growth in the number of contract subscriptions increased (Figure 1.29). Figure 1.29 Pre-pay and contract mobile subscriptions

38.9 100 34.7 36.3 40 32.7 33.7 34.4 76.8 Contract 80 73.8 65.8 70.1 30 60.0 60 52.9 26.8 29.9 22.6 24.3 Pre-pay 20.2 20 40 17.3 10 Proportion 20 39.8 43.2 45.8 47.0 46.9 35.6 contract

Subscriptions (millions) Proportion contract (%) (RHS) 0 0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Notes: Based on network operator reported figures; likely to overstate activity in reference quarter; includes estimates where Ofcom does not receive data from the operators

37 Telecoms operators cut costs

As the economic climate puts pressure on profitability and makes bottom-line margins more important than top-line growth, operators have focused on reducing costs:

 BT cut 15,000 jobs in 2008 and in March 2009 announced a pay freeze for its 100,000 employees5. In February 2009, mobile operator Vodafone, said that 500 UK jobs would be cut6.

 Some mobile network providers have started to offer preferential tariffs to new customers signing up with their own (tied) service providers directly rather than using a third-party dealer. In this way they can reduce commission payments to dealers.

 Some mobile network providers have sought to reduce operating costs by sharing networks to avoid duplication of infrastructure. In March 2009, Vodafone and O2 agreed to do this in several European countries, including the UK. T-Mobile and 3UK have jointly operated a 3G network in the UK since 2007.

 In March 2009, Orange announced that it was outsourcing its mobile network operations in the UK to cut costs7, and in June 2009 Kingston Communications signed a similar contract to outsource the management of its network assets to BT.8

5 http://www.btplc.com/News/ResultsPDF/q409release.pdf 6 http://www.independent.co.uk/news/business/news/vodafone-cuts-500-uk-jobs-1630547.html 7 http://www.nokiasiemensnetworks.com/global/Press/Press+releases/news- archive/Orange+to+outsource+mobile+network+operations+in+the+UK.htm 8 http://www.kcom.com/mediacentre/news/news_article.asp?ArticleID=DA_223187

38 1.4 Consumers embrace DVRs

1.4.1 Introduction, structure and key findings

Introduction

Domestic television recording hit the mainstream in the 1970s with the widespread adoption of analogue video cassette recorders (VCRs). As innovations such as Videoplus and barcode readers improved the ease with which programme details could be captured and programmes recorded, VCR take-up reached a high of 91.2% of UK homes in 2001. However, by today’s standards, functionality remained limited and the user experience felt cumbersome. Penetration of VCRs had fallen to 57% of UK homes by 20089 as consumers abandoned the analogue devices in favour of digital equipment such as DVD players and recorders, and digital video recorders (DVRs).

The DVR - also known as a personal video recorder (PVR) or digital television recorder (DTR) - offered consumers greater convenience and control over their television watching than had been available through VCRs. DVRs removed the need for physical tapes and, for the first time, viewers could rewind and pause live television and record one or more programmes while watching another. DVRs contain an internal hard drive - similar to those used in personal computers - which allows consumers to record and store programmes in digital format.

American company TiVo was the first to offer DVRs in the UK in October 2000, with the launch of its eponymous device that worked with satellite, terrestrial and cable television. A year later BSkyB launched its Sky+ product. This was followed in 2003 by DVRs for the Freeview DTT service and in 2006 by Telewest’s TVDrive, which later became V+ with the creation of Virgin Media. Other DVR devices include Top Up TV’s Freeview+, BT Vision’s Vision+, Tiscali +, Freeview+ (previously Freeview Playback) and Freesat+ (the ‘+’ symbol now seems synonymous with digital television recorders in the UK).

Structure

We have chosen to focus on DVRs in this section because of the growing appetite among consumers for recording broadcast programmes for playback later. Nearly 9 million DVRs have been sold since 2000, helped in large part by the move to digital broadcasting. We cover other forms of non-linear broadcasting, such as online catch-up TV and video-on- demand, in the Converging Markets section: 5.2.2 (page 265). Here we set out key metrics on the take-up and use of DVR products and identify trends in consumer attitudes towards DVR use.

Key findings

Key findings in this section include:

 More than a quarter of consumers (27%) claimed to use a DVR at the end of March 2009, equivalent to 7 million homes, according to Ofcom research. This rose to nearly a third of consumers (31%) in multichannel television homes (page 41).

 These figures are a little lower than those for operator and sales data, which suggest that nearly 9 million DVRs had been sold in the UK at the end of March 2009. The five million Sky+ boxes (launched in September 2001) made up the majority of the UK DVR universe at the end of Q1 2009, followed by Freeview+ and

9 Source: BVA Yearbook 2009 (GfK, BVA, Screen Digest)

39 Freesat+ and Top Up TV devices, which together accounted for around 2.6 million devices (page 41).

 15% of viewing across the five main PSB channels in 2008 was of programmes recorded using a DVR, according to data from BARB, the television industry’s audience measurement organisation. In Sky+ homes this rose to 19% (page 42).

 Adults aged 16-34 are the group most likely to watch programmes recorded on a DVR; 19% of viewing among this age group was on a recorded basis in 2008 according to BARB, compared to 11% for viewers aged 55 and over (page 43).

 High-definition programmes are among those most viewed after their initial broadcast in Sky+ homes, according to viewing data from the SkyView panel. A third of viewing of Drama serials and series in Sky+ homes is recorded (pages 46 and 48).

 42% of consumers said that they watched a greater variety of programmes since owning a DVR, although a third (33%) disagreed with this. Eighty per cent of consumers believe that they watch more programmes that they enjoy because they have a DVR (page 51).

 DVRs are becoming increasingly advanced, offering viewers search functionality and ‘push’ video-on-demand, where programmes are downloaded to the hard disk drive, for example. Hard drives are also increasing in size; some DVRs offer up to 250 hours of recording, up markedly from the 40 hours available on early generations of devices (page 51).

 The average retail price of DVRs for the Freeview market had fallen to £106 at the end of March 2009, down from £172 in March 2005, according to GfK sales data. Similarly, the costs of DVRs from the main pay-TV operators have fallen (page 52).

 Consumers are using a range of services to ‘catch up’ on television programmes including online catch-up TV and TV-based video-on-demand. We explore these in detail in section 5.2.2 (page 265).

1.4.2 More than a quarter of homes have a DVR

Twenty-seven per cent of consumers (equivalent to around 7 million homes) said that they used a digital video recorder (DVR) in their home in Q1 2009, according to Ofcom research. This represents an increase of seven percentage points from Q1 2008 (Figure 1.30). This rose to nearly a third (31%) among those with multichannel television, up from 23% a year earlier.

Figure 1.30 DVR take-up

31 30 27 23 20 Q1 2008 % 20

*Q1 2009 10

0 Have DVR - all Have DVR - all with multichannel tv

Source: Saville Rossiter-Base, Technology Tracker Q3 2008 (July/Aug) QR1/2 Do you have a recorder for your TV service which allows you to pause and rewind live TV, such as Sky Plus, V Plus or BT Vision V-Box? Do you personally use this DVR? 2009 – QR1a-e Ownership asked among owners of each TV service. Does your service allow you to record and store programmes, pause and rewind live TV? Base: All respondents (1581), all with multi-channel TV (1345) * Question wording changed in Q1 2009 so data not directly comparable with Q3 2008.

While our research found that 27% of homes claimed to use a DVR, this could be an underestimate. According to operator and retail data, nearly 9 million DVRs had been sold (or rented to consumers) at the end of Q1 2009. The discrepancy could be accounted for by ownership of multiple DVRs, the replacement of devices and also a lack of consumer understanding of what device they own and its functionality.

BSkyB’s Sky+, which launched in September 2001, accounts for the largest part of the UK DVR market – 5 million homes, or around 60% of all DVRs sold at the end of March 2009 (Figure 1.31). We estimate that Freeview+, Freesat+ and Top Up TV devices combined accounted for about 2.6 million, followed by V+ (0.6 million) and BT Vision’s Vision+ (0.4 million).

Figure 1.31 UK DVR sales/rentals, Q1 2003 – Q1 2009 Units sold (m)

9 BT Vision 8

6 Freeview+, Freesat+, 5 Top Up TV 4 V+ 3

2 Sky+ and 1 Sky+ HD 0 03 03 04 05 06 07 08 02 02 03 02 03 04 05 06 07 08 02 03 04 05 06 07 08 03 03 04 05 06 07 08 09 ------ar ec ep ep un Jun Jun Jun Jun Jun Jun Mar Mar Mar Mar Mar Mar Mar Dec Dec Dec Dec Dec Dec Dec Sep Sep Sep Sep Sep Sep Sep

Source: Operator results, GfK sales data and Ofcom estimates Note: Figures represent sales and not homes. Freeview+and Freesat+ data based on GfK sales data. BT Vision, V+, Sky+ and Sky+ HD based on operator data. Sky+ figures include the Republic of Ireland. V+ boxes are rented to Virgin Media customers.

41 1.4.3 DVR use varies by age, platform and channel

There are growing signs that DVRs are increasingly influencing the way that people watch television, but the impact they have varies by age, platform and channel.

Figure 1.32 illustrates the proportion of recorded viewing attributed to the five main PSB channels. 10 BBC One and ITV1, the two largest networks by audience and programming investment, attracted the highest proportion of live viewing in 2008, according to BARB data. Recording was most prevalent among channels that typically carry more Factual or Drama series in their schedules (particularly US acquisitions); around 20% of viewing on each of BBC Two, Channel 4 and Five was watched via a DVR in 2008.

The time consumers choose to watch their recorded content also varies on average across the five PSB channels; there was a roughly equal split between recorded programmes watched on the same day as the broadcast (8%) and those watched two to six days later (7%). But for BBC Two and Five, the two channels with the greatest amount of recorded viewing, more programmes were watched two to six days later (as BARB measurement covers only up to seven days after the original broadcast, the data may underestimate the total proportion of recorded viewing).

Figure 1.32 Proportion of live and recorded viewing across five PSB channels

Proportion of viewing (%) 100% 5% 7% 6% 10% 8% 11% 7% 7% 8% 9% Recorded: 8% 10% 80% viewed 2 - 6 days after broadcast 60% Recorded: viewed 85% 87% 87% same day as 40% 82% 82% 81% broadcast

Viewed 20% initial broadcast

0% Main PSBs BBC One BBC Two ITV1 Channel 4 Five Source: BARB 2008, all individuals with DVRs Note: Totals may not equal the sum of the components due to rounding

Recorded viewing was most prevalent among DVR owners aged 16-34, where it accounted for 19% of all programmes watched. More than half of this (11%) was done on the same day as the broadcast, while 8% was watched within two to six days. DVR owners aged over 55 watched the lowest proportion of recorded programmes - 11% of their total viewing - of which most was watched between two and six days after the initial broadcast.

10 The term ‘time-shifting’ is also sometimes used to describe viewing recordings of broadcast programmes. However, in this report we simply use the term ‘recording’ in order to distinguish it from the activity of watching programmes on ‘+1’-type channels, those that repeat a broadcast an hour after the initial showing.

42 Figure 1.33 Proportion of live versus recorded viewing, by age, 2008

Proportion of viewing (%) 100% 7% 8% 8% 7% 6% 5% 8% 8% 11% 8% Recorded: 80% viewed 2 - 6 days after broadcast 60% Recorded: viewed 89% same day as 40% 85% 84% 81% 85% broadcast

Viewed 20% initial broadcast

0% All DVR inds DVR Children DVR 16-34 DVR 35-54 DVR 55+ Source: BARB 2008, all individuals with DVRs Note: Totals may not equal the sum of the components due to rounding

When splitting the DVR user base by socio-economic group, there was little variation. DVR users in the AB socio-economic group were representative of the national average, with 85% of their viewing time spent watching live TV, 8% recorded and played back on the same day as broadcast and 7% within two to six days. Those with DVRs in the socio-economic DE group watched fractionally more live television (86%) while C1C2s watched the least (84%).

Figure 1.34 Proportion of live versus recorded viewing, by socio-economic group

Proportion of viewing (%) 100% 7% 8% 8% 7% 8% 8% 9% 7% Recorded: 80% viewed 2 - 6 days after broadcast 60% Recorded: viewed 86% same day as 40% 85% 84% 84% broadcast

Viewed 20% initial broadcast

0% AB inds with DVR C1 inds with DVR C2 inds with DVR DE inds with DVR

Source: BARB 2008, all individuals with DVRs Note: Totals may not equal the sum of the components due to rounding errors

Figure 1.35 focuses on how the proportion of average recorded viewing differs by platform. Of the main DVR services, Sky+ users watched the highest proportion of recorded content during 2008 (just under 19%), according to BARB. As BSkyB was the first platform operator to offer a DVR, this could be explained by the maturing Sky+ user base, increasingly at ease with using recording functionality. V+ users watched significantly less recorded viewing from the DVR (12%), which might be influenced by the availability of VoD in those homes, while the figure for Freeview DVR users dropped to 9%.

Figure 1.35 Proportion of live versus recorded viewing, by platform, 2008

Proportion of viewing (%)

100% 4% 9% 5% 5% 7% Recorded: 10% viewed 2 - 80% 6 days after broadcast 60% Recorded: viewed 91% 88% same day 82% 40% as broadcast Viewed 20% initial broadcast

0% All inds with Sky+ All inds with Freeview DVR All inds with V+ Source: BARB 2008, all individuals with DVRs. Note: Totals may not equal the sum of the components due to rounding errors

Both recorded and live viewing in Sky+ homes increased between January to May 2007 and the same period in 2009, by two minutes and four minutes respectively (Figure 1.36).

Figure 1.36 Daily TV viewing in Sky+ homes, live and recorded, Jan - May

Total viewing

3.5

3 34 mins 32 mins 34 mins 34 mins 2.5 Recorded viewing 2

Hours 1.5 Live viewing 2 hrs 36 mins 2 hrs 40 mins 2 hrs 40 mins 1

0.5

0 2007 2008 2009

Source: BARB: Jan-May 2007-2009 (Base: individuals in Sky+ homes, viewing via the Sky box, average hours all)

Among younger people, who traditionally watch less television, total viewing was up slightly between 2007 and 2009. Among adults aged 16-34 in Sky+ homes, between January and May, the amount of recorded viewing increased by six minutes between 2006 and 2009, rising from 18% of the total to 22% (Figure 1.37). Live viewing among this group fell over the same period from 2 hours 21 minutes to 2 hours 18 minutes. The SkyView panel, BSkyB’s audience measurement panel, covers 33,000 homes, of which around 9,000 have Sky+ devices.11

11 http://www.skymedia.co.uk/_downloads/64/SkyView%20Venn.pdf

Figure 1.37 Daily TV viewing in Sky+ homes, live and recorded, adults 16 - 34, Jan- May

Total viewing

3.5

32 mins 34 mins 38 mins 2.5

2 Recorded viewing

1.5 Hours 2 hrs 21 mins 2 hrs 24 mins 2 hrs 18 mins Live viewing 1

0.5

0 2007 2008 2009

Source: BARB, (January – May 2007 - 2009, base: adults 16-34 in Sky+ homes. Viewing by the Sky box, average hours, all)

These findings are broadly compatible with our consumer research, which found that the majority of DVR owners (72%) claimed to watch ‘about the same’ amount of television since getting the device, while 17% believed that they watched more television, and 8% thought they watched less.

Figure 1.38 Whether DVR ownership has changed amount of TV viewing

More About the same Less Don't know

TV watched since 17 72 8 4 getting DVR

0% 20% 40% 60% 80% 100% % Source: Saville Rossiter-Base, Technology Tracker Q3 2008 (July/Aug). Base: Those with a DVR (320) QR10 Since getting your DVR, do you think you watch more, less or about the same amount of television?

1.4.4 Films and HD channels prove popular for recording

High-definition (HD) television channels accounted for three of the four channels with the greatest proportion of recorded viewing in Sky+ DVR homes in the first half of 2009, according to SkyView data (Figure 1.39). In particular, 59% of Sky 1 HD viewing was recorded, substantially ahead of Channel 4 HD, with 43%, and BBC HD with 33%.

45 Figure 1.39 Most-recorded channels in Sky+ homes, Jan-May 2009

Sky 1 HD 41% 59% Channel 4 HD 57% 43%

Five 65% 35% BBC HD 67% 33%

Five USA 67% 33% Fiver 68% 32% FX 68% 32% Live viewing E4 68% 32% (%) BBC 4 69% 31% Recorded viewing (%) Sky Movies Premiere 69% 31% Sky 1 69% 31%

Living 70% 30% More 4 71% 29% Sci-Fi Channel 74% 26% BBC 3 74% 26% Channel 4 75% 25%

0% 20% 40% 60% 80% 100% % Source: SkyView Jan – May 2009 (Base: All PVR individuals)

Five and Channel 4 are the only main PSB channels to be included among the 16 channels with the highest proportions of recorded viewing, with more than a third (35%) of all Five viewing being recorded, compared to 25% for Channel 4. However, the portfolio channels of the PSBs constituted half (eight) of the channels included in this analysis. The remainder were made up by multichannels Living TV, Sci Fi Channel and FX, which often show US Drama acquisitions, and by Sky Movies Premiere, the only dedicated film channel in this list.

These trends could be explained by a number of factors:

 Given the limited availability of HD compared to standard-definition content, it is possible that viewers record HD programmes to get the most out of the subscription.

 Generally, the channels included in the list are those that broadcast the commonly- recorded programme genres: Drama, Soaps, Documentaries, Art, Comedy and Entertainment. (Film is the exception here) (Figure 1.40).

 A higher proportion of recording could also suggest that a channel offers ‘must-see’ programming (Ofcom research found that 82% of respondents said that their main reason for recording a programme was that they were not at home).

46 Figure 1.40 Programme genres most likely to be recorded

Films 62

Drama 53

Documentaries 48

Comedy 35

Soaps 34

Live sports 34

Sports highlights and sports shows 24

Science, nature and wildlife programmes 19

Entertainment including comedy 18

0 20406080100 % Source: Saville Rossiter-Base, Technology Tracker Q3 2008 (July/Aug)QR8 Please indicate which, if any, of the following types of programmes you are more likely to record and watch later using your DVR? Base: Those with a DVR (320)

Viewing data on actual recording are broadly consistent with consumer research on claimed behaviour for recorded viewing (Figure 1.40 and Figure 1.41).

Our research found that Film was the genre most likely to be recorded by DVR users. In Sky+ homes, films ‘for cinema’ and films ‘made for TV’ feature in the list of genres with the highest proportion of recording. Seventeen per cent of films that were made for cinema were watched on a recorded basis, compared to 13% of made-for-TV films.

For some Film channels and some households, the film viewing experience is a live family event at a scheduled time. In addition, many film channels have numerous multiplexes and ‘+1’ channels, so viewers might not need to record films as much as genres like Drama.

Figure 1.41 shows that Drama and Soaps were the most-recorded programming genres in Sky+ homes, accounting for 33% and 29% of viewing respectively between January and April 2008. Programme genres that lend themselves best to live viewing, such as Sports and News, had a lower propensity for recorded viewing, according to Ofcom’s consumer research and the SkyView data.

47 Figure 1.41 Proportion of live versus recorded viewing, Sky+ homes

Drama:Series/Serials 67% 33%

Drama:Soaps 71% 29%

Drama:Single Plays 73% 27%

Arts 84% 16%

Films: made for cinema 83% 17%

Entertainment 86% 14% Live viewing (%) Films: made for TV 87% 13% Recorded Hobbies/Leisure 87% 13% viewing (%)

Current Affairs 91% 9%

Sport 92% 8%

Children's 92% 8%

Music 94% 6%

Ne ws / We at h e r 97% 3%

0% 20% 40% 60% 80% 100% % Source: SkyView 01/01/2008-30/04/2008 (Base: All DVR individuals)

1.4.5 Drama series attract more recorded than live viewing in Sky+ homes

The ten most often-recorded programmes in Sky+ homes were all US series - none of them with more than 35% live viewing - and nine of the ten were broadcast on channels which carry advertising (Figure 1.42). US-produced series usually consist of around 22 episodes, which requires a strong viewing commitment for anyone not wanting to miss a programme; DVRs make this much easier to achieve.

48 Figure 1.42 Popular recorded shows, series average, Sky+ homes, Jan-May 2009

Dirty, Sexy Money (E4) 28% 72%

Heroes (BBC 3) 29% 71%

24 Season 7 (Sky 1) 31% 69%

Fringe (Sky 1) 31% 69%

Live viewing Prison Break (Sky 1) 31% 69% (%)

Recorded Lost (Sky 1) 34% 66% viewing (%) Desperate Housewives 34% 66% (Channel 4) A Town Called Eureka (Sky 35% 65% 1)

The Mentalist (Five) 35% 65%

Lipstick Jungle (Living) 35% 65%

0% 20% 40% 60% 80% 100% % Source: SkyView, Jan-May 2009 (Min TVR = 1.0, Average all occurrences), all individuals with Sky+

Figure 1.43 shows that in Sky+ homes most recorded programmes are watched within a week of the recording date. Sixty-one per cent of recorded viewing took place within a day of broadcast, 91% within seven days, and only 9% later than this, according to SkyView data.

Figure 1.43 Time between recording and playback of programmes in Sky+ homes

% of recorded viewing

100 90 80 91% within 7 days 70 60 61% within a day 50 40 30 20 10 0

se 2 4 6 8 2 4 8 2 8 u 10 1 1 16 1 20 2 24 26 2

ive Pa L

Source: SkyView six months ending March 2009 (Total TV).

1.4.6 Three-quarters of viewers claim to fast-forward most adverts

Consumer research carried out last year by Ofcom found that just over three-quarters (76%) of respondents said that they fast-forward through adverts ‘always or almost always’ when

49 watching recorded programmes on DVRs (this compares to 78% when Ofcom conducted similar research in July 2007). A further 9% of respondents believed that they fast-forwarded through adverts ‘about half of the time’. Just 7% said that they ‘never or hardly ever’ skipped through the adverts, while another 7% said that they never played back programmes from channels containing adverts.

It should be noted that claimed behaviour in consumer research can differ from actual behaviour. Thinkbox, the marketing body for commercial television in the UK, cited SkyView data in its 2008 annual report, which stated that Sky+ DVR homes watched 30% of advertising breaks at normal speed, which is more than our research would suggest (Figure 1.44). Thinkbox also reported that those with Sky+ DVRs watched 2% more adverts than they did before they owned a DVR.12

Recent research carried out by Actual Consumer Behaviour (ACB) recorded television viewing of couples and families in the living room and shared spaces. The research recorded actual rather than claimed behaviour and found that 29% amount of viewing was from programmes recorded on a DVR. It also found that participants still overstated their viewing via DVR and when asked about their overall viewing.

Figure 1.44 Whether viewers fast-forward adverts with DVRs

Always or almost always 76

About half of the time 9

Never or hardly ever 7

Never play back programmes from channels 7 with ads

020406080100 % Source: Saville Rossiter-Base, Technology Tracker Q3 2008 (July/Aug) QR9 When you watch recordings you have made with your DVR, how often, if at all, do you fast forward through the adverts? Base: Those with a DVR (320)

However, the emergence of DVRs has not yet had the cataclysmic effect on the UK television sector that had been predicted by some technologists and advertisers. Broadcasters and advertisers are now adapting advertising methods to fit the DVR environment. For example:

 Some channels are displaying programme brand ‘idents’ in advance of the programme starting, which could help to ensure that viewers fast-forwarding through advertisements return to the normal viewing speed earlier. This will expose them to more adverts and trailers at normal speed.

12 http://www.thinkbox.tv/upload/pdf/Thinkbox_Annual_Review_20090319.pdf

50  Sponsorship of television programmes is attracting greater levels of interest and investment than five years ago. This involves advertising using brand ‘bumpers’ immediately next to a programme (after the last advert in a break). This means that even if viewers fast-forward the adverts, they should see a sponsor’s message or brand. Television sponsorship revenue increased from £112m in 2004 to £180m in 2008.

 Some advertisers are looking to create bigger and more static branding on adverts where the message or product can still be identified in the fast-forward mode.

1.4.7 DVRs users watch more television that they enjoy

Many viewers with DVRs claimed that they watched more programmes that they enjoyed, and also saw a greater variety of programming, since getting their device. Our research found that 80% of respondents agreed that: ‘I now watch more programmes that I enjoy because of my DVR’. This compared to 78% of respondents enjoying programmes more because they had access to on-demand services, and 65% enjoying programmes more because they had access to television content online. In addition, 42% of consumers either agreed, or strongly agreed, with the statement: ‘I watch a greater variety of programmes since getting my DVR’, while 33% disagreed (Figure 1.45).

Figure 1.45 Agree – ‘I watch a greater variety of programmes since getting my DVR’

Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree No opinion

10 3222 24 9 3

0% 20% 40% 60% 80% 100%

Source: Saville Rossiter-Base, Technology Tracker Q3 2008 (July/August) QR11B Please tell me how much you agree or disagree with the statement…? Base: Those with a DVR (320)

1.4.8 DVRs are adding greater functionality and storage

As penetration of DVRs has increased in recent years, so has the level of device sophistication. However, UK manufacturers and pay-TV operators have resisted developing some of the DVR applications around personalisation and viewer preferences, which services like TiVo have pioneered in the USA. For example, TiVo’s ‘Wishlist’ application allows users to record automatically any programme containing a pre-selected keyword, actor, director or sports team. This functionality has been further advanced by the addition of a broadband connection to the TiVo DVR, which allows viewers to access content from online video-sharing websites such as YouTube or film services such as Netflix, and apply their Wishlist preferences to them.

Nonetheless, services such as Top Up TV and Sky Anytime TV offer consumers some additional viewing options. Top Up TV pioneered the so-called ‘push’ VoD approach, whereby a portion of the hard drive is partitioned so that programmes can be downloaded to

51 the set-top box. Sky Anytime is a similar service that downloads a selection of 35 hours of the week's television programming to around four million Sky+ and Sky+ HD boxes, helping attract additional audiences beyond the original broadcast. The service also introduces viewers to new channels and programming that they might not otherwise find.

Figure 1.46 details the cumulative audience for BSkyB’s one-off drama Skellig, which first aired on Sky 1 at Easter. Viewing on Sky Anytime contributed 9.4% of total viewing of the drama, equivalent to 69,000 extra viewers. Sky+ DVR viewing contributed another 183,000 viewers, or a quarter of the total cumulative audience. The first broadcast of the programme was seen live on Sky 1 and Sky 1 HD by just over half (50.6%) of the total audience, or 372,000 viewers.

Figure 1.46 Share of Sky platform viewing: Skellig (one-off drama)

Performance of Skellig in all homes (%)

Sky Player, 0.4% Sky Anytime, 9.4%

Repeats (time-shift), 3.0%

Repeats Sky 1,2, HD (live) Premiere (live) 14.1% 42.6%

Premiere (time-shift), 22.0%

Premiere HD 8.0%

Source: Viewing based on BARB (all individuals, Anytime based on BSkyB/TNS, SkyView)

1.4.9 Hard disks: bigger and cheaper

Manufacturers have taken advantage of lower costs to increase storage capacity in some DVR devices. Early models typically offered 80GB - 160GB, allowing 40 - 80 hours of recording time in standard-definition television (30 hours of high-definition programmes, with Sky+ HD). These are still offered as standard by BSkyB and Virgin Media, although the latest Top Up TV Freeview+ enables 180 hours of recording. But boxes with 500GB, capable of 250 hours of storage, are now available for use on Freeview (Figure 1.47).

52 Figure 1.47 Personal recording capacity of current-generation DVRs

250 250

200 200 180

150 Hours

100 80 80 80 80

50 50 40

0 BT Vision Freesat+ Freeview+ Freeview+ Sky+ Sky+ HD Tiscali+ Top Up TV V+ (low end) (high end) Freeview+

Source: Operator websites, July 2009 Notes: Figures are indicative potential consumer recording hours of standard-definition content for current generation devices. Freeview+ devices are typical storage levels for low and high range boxes

As storage increases, the average prices of Freeview DVRs had fallen to £106 at the end of Q1 2009, up slightly from £105 a year earlier but down from £137 in Q1 2007. This is considerably lower than the average price of £172 in March 2005.

The prices of DVRs available from pay-TV operators have also reduced over time. BSkyB has offered its Sky+ box free of charge for limited periods (it is usually £99). In January 2009 the company embarked on a major marketing campaign for its Sky+ HD box and reduced the price from £150 to £50. Virgin Media’s V+ is rented to consumers and costs £99 for installation, down from £150. In 2004, BSkyB removed the £10 subscription charge for Sky+ while Virgin Media reduced or removed the monthly charge for V+, depending on the customer’s television package.

53 1.5 The nations’ communications markets

1.5.1 Introduction, structure and findings

Introduction

Ofcom publishes four nations’ Communications Market Reports (CMRs) alongside this report. The ‘nations’ dimension of communications policy development is becoming increasingly important (e.g. the future of public service broadcasting and the universal availability of 2Mbit/s broadband), so the need for a strong understanding of the characteristics of service availability, take-up and consumption by nation grows. To this end, this section provides a short summary of the findings of CMR: Nations reports13.

Structure

The section begins by summarising the availability of communications services and consumer take-up across England, Scotland, Wales and Northern Ireland (Sections 1.5.2 and 1.5.3, pages 55 and 56). It then looks at how consumers in each nation are increasingly choosing to take ‘bundles’ of services from a single provider (Section 1.5.4, page 58), before examining the investments made by PSBs in television and radio content (Section 1.5.5, page 59). We conclude by analysing the differences between the ways in which people in the four nations consume communications services (Section 1.5.6, page 60).

Findings

The main findings of this section are:

 Availability: Fixed-line telephony and DSL broadband are available to the large majority of the people in every nation; 2G mobile is available in most postcode districts in England, and in around nine in ten in Scotland, Wales and Northern Ireland. Local loop unbundling is less than universally available – to around nine in ten homes in England but only seven in ten in Northern Ireland (but its footprint is growing quickly). Cable infrastructure extends to around 49% of the UK population – from 53% of homes in England to just 24% in Wales. (Section 1.5.2, page 55).

 Take-up: Personal use of mobiles was more prevalent than use of fixed lines in every UK nation for the first time in 2009. Broadband was the fastest-growing communications platform, with double digit take-up increases in England, Wales and Northern Ireland. Levels of digital television take-up across the UK began to converge, ranging from 89% in Wales and Northern Ireland to 91% in Scotland (Section 1.5.3, page 2).

 Bundling of services: UK consumers showed a renewed interest in bundled services during 2008/09. Forty-six per cent of homes took two or more services from the same supplier, after two years when take-up remained stable at 40%. People in England were most likely to take a bundle (48%), but take-up growth was fastest in Wales and Northern Ireland – up by 10 percentage points (to 35%) and 11 percentage points (to 39%) respectively (Section 1.5.4, page 58).

 Content production: During 2008, spend per head on networked television production was highest in England at £35.51; investment on TV hours for a nation was highest in Northern Ireland (£16.05), while expenditure on non-English language output was greatest in Wales at £24.38 (Section 1.5.5, page 59).

13 See http://www.ofcom.org.uk/research/cm/cmrnr09/

54  Consumption: People in Scotland watched more TV than anywhere else in 2008 (4.2 hours/day/head versus UK average of 3.8). PSB TV output was most popular with viewers in Wales (62% share of viewing) and least popular in London (57%). Hours of radio listening per head across the four nations were similar at around 3.2 hours per listener per day. The popularity of the BBC’s radio services varied by nation – from 46% of listener hours in Scotland to 63% in Wales. The predominant means of making and receiving calls also differed; in Northern Ireland, one in every two people rely on mobile, while in Scotland, 64% mainly use their fixed line (Section 1.5.6, page 60).

1.5.2 The availability of communications services across the UK

Patterns of communications service availability across the UK:

1. Universal (or near-universal) coverage for fixed, 2G mobile and broadband In 2008 fixed-line telephony services were universally available across the UK. The same was almost completely true for 2G mobile coverage, which reached 99% of homes in England; in Scotland the figure was 89%. Broadband infrastructure availability also rose across the UK, largely thanks to the growing availability of DSL, which was universally available in England, Wales and Northern Ireland in 2009, dropping fractionally in Scotland to 99.9%. But cable-based broadband infrastructure was less widely available, covering just over one in two homes (52%) across the UK; availability was lowest in Wales, where only one in four homes had access.

2. Lower but growing levels of availability of local loop unbundling Eighty-four per cent of UK homes were connected to an unbundled exchange in 2009, with coverage rising by four percentage points over the year. Availability was highest in England (at 87% of homes) and lowest in Scotland (70%). The differential rates at which exchanges unbundled across the four nations during 2008 narrowed the gap in LLU availability between the UK and Wales (where the gap now stands at just eight percentage points, down from 20 a year ago) and Northern Ireland (where the gap was 16 percentage points in Q1 2009, down from 23 percentage points). 3G coverage was lower than its 2G counterpart in every nation; it was highest in England (at 91%) and lowest (at 43%) in Northern Ireland. Having changed the 3G coverage measurement threshold in 2008 (raising the geographic coverage requirement to 90% within each postcode district), time series data are not available.

3. Less than universal and stable coverage levels for cable Cable infrastructure currently covers 49% of the UK population. It was highest in England at 53% and lowest in Wales at 24% in 2008. Nationwide coverage for the full digital terrestrial television service stood at 73% of homes in 2009 (unchanged on 2008). Coverage was highest in Scotland (83%) and lowest in Wales and Northern Ireland, at 57% and 58% respectively. As digital switchover sweeps over Wales and parts of England during 2009, take-up will rise progressively, both as DTT power levels rise and as transmitter sites switch to DTT. By the end of 2012, DTT coverage for all six multiplexes will reach around 90% of homes while the comparable figure for the PSB multiplexes will stand at 98.5%.

55 Figure 1.48 Availability of communications infrastructure in 2009 Proportion of homes/individuals (%)

100

60 99% 100% 100% 100% 100% 100% 100% 100% 99.9% 92% 92% 91%

40 89% 87% 82% 76% 73% 71% 70% 67% 67% 63% 58% 20 53% 43% 38% 30% 0 24% Fixed line DSL 2G mobile LLU 3G mobile Digital Cable terrestrial

England Scotland Wales Northern Ireland

Sources: Ofcom and: 1. Proportion of population living in postal districts where at least one operator reports at least 90% 2G area coverage. Sourced from GSM Association / Europa Technologies (Q1 2008). Note we have raised this threshold from 75% in 2008; as a result we do not have time series data. 2. Proportion of population living in postal districts where at least one operator reports at least 90% 3G area coverage. Sourced from GSM Association / Europa Technologies (Q1 2008). Note we have raised this threshold from 75% in 2008; as a result we do not have time series data. 3. Proportion of premises able to receive DSL services based on data reported by BT. 4. Proportion of households passed by Virgin Media’s broadband-enabled network. 5. Proportion of households connected to an LLU-enabled exchange. 6. IPTV availability figure calculated on the assumption that Tiscali TV is now available in London, Stevenage, Birmingham, Newcastle and Edinburgh. 7. Availability of services from all six digital multiplexes. 8. DAB digital radio coverage figure based on a Digital One estimate. Both the BBC and Digital One built new transmission masts during 2006/07.

1.5.3 Device and service take-up across the UK’s nations

Mobile use exceeds fixed line for the first time across all nations during 2008/09

A range of different trends emerged in device and service take-up across the UK nations during 2008/09:

 Personal use of a mobile phone was higher than fixed-line access in every UK nation for the first time during 2008/09. An average of 89% of people across the UK claimed that they personally used a mobile phone in Q1 2009. In Northern Ireland use rose by eight percentage points to 93% (widening the gap with the UK average by three percentage points). Take-up was lowest in Wales (85%) – and the gap with the UK average widened over the year from two to four percentage points.

 Residential broadband adoption (fixed or mobile) rose faster across the UK than any other communications service during 2008/09, up by 11 percentage points to 68% by Q1 2009. It was highest in England (70%, up by 12 percentage points) and lowest in Wales (58%, up by 13 percentage points year on year). Growing take-up across the UK resulted in a narrowing of the gap with the UK average for every nation except Scotland.

56  Levels of digital television take-up in 2008/09 across the UK nations began to converge in 2009. Overall, take-up stood at 90% in Q1 2009, up by five percentage points year on year. Differences in take-up by nation began to disappear during 2008/09 - penetration stood at 91% in Scotland (up by six percentage points) 89% in Wales (up by five percentage points) and 89% in Northern Ireland (up 10 percentage points). The gap between take-up in Scotland and in Northern Ireland with the UK- wide average narrowed by one and five percentage points respectively during the year.

 Larger differences remained in DAB set adoption across the UK’s nations during 2008/09 – possibly reflecting different levels of service availability by nation. Forty-three per cent of individuals across the UK claimed to have access to one or more DAB digital radio sets in the first quarter of 2009 (up by eight percentage points year on year). Take-up stood at 29% in Scotland, 28% in Wales and 22% in Northern Ireland.

Figure 1.49 Technology adoption across the UK, Q1 2009

Change year-on-year +5 +4 +6 +5 +10 0 +1 -3 +4 -1 +5 +4 +5 +3 +8 +11 +12 +7 +13 +12 - - - - - 100 s al u id 80 iv d in f 60 o n

o 93% 91% 90% 90% 89% 89% 89% i 89% 40 88% 87% 87% 86%

t 85% 84% r 83%

o 70% 68%

p 64% 60% ro 20 58% 44% P 41% 27% 25% 0 19% DTV Fixed Mobile Broadband DAB

UK England Scotland Wales N Ireland

Source: Ofcom research, Quarter 1 2009 Note: The take-up figures for DAB in this chart represent the proportion of radio listeners who claim to have access to a DAB digital radio set in their home. It is not directly comparable to the DAB take-up figures on page 151, which represents the proportion of all individuals.

Figure 1.50 sets out patterns of broadband and digital television take-up across the UK nations’ largest cities, using Ofcom’s city-based consumer research. Digital television take- up peaked at 96% in Edinburgh, but fell as low as 71% in Londonderry/Derry. Broadband take-up was highest in London at 79%, but was just 39% in Glasgow.

57 Figure 1.50 Digital television and broadband take-up in the nations’ largest cities Proportion of homes/individuals (%)

Digital TV Broadband 100

60 96% 95% 94% 94% 93% 90% 88%

40 87% 85% 79% 78% 73% 72% 72% 71% 63% 62% 62% 61% 20 58% 58% 39%

0 Cardiff Belfast L/Derry London Glasgow Liverpool Swansea Aberdeen Edinburgh Manchester Birmingham England Scotland Wales N Ireland

Source: Ofcom research, Quarter 1 2009

1.5.4 Communications service bundling

Bundling most popular among people in England

In 2008/09 consumers in the UK showed a renewed interest in communications service bundling. Nationwide, 46% took more than one service from a single provider in Q1 2009, up by six percentage points year on year. This followed two years when the take-up of bundles had plateaued at 40% of homes.

Bundling was most popular among people in England (where take-up stood at 48% in Q1 2009), while the fewest people claimed to have a bundle in Wales (35%). The popularity of bundles grew in both Wales and Northern Ireland, so that the gap between the UK average and those two nations narrowed by three and four percentage points respectively.

Consumer preferences for bundles vary substantially by nation. Two concurrent services were popular among two-thirds of bundlers in Wales and Northern Ireland (compared to the UK-wide average of 56%). ‘Triple-play’ was most popular in Scotland, where 45% of homes with a bundle took three services together (compared to the UK-wide average of 35%).

58 Figure 1.51 The prevalence of and type of service bundling, by nation

Homes with bundles (%) and increase year-on-year (percentage points) 46% 48% 42% 35% 39% 7pp 7pp 4pp 10pp 11pp Number of services 100% 4% 4% 3% 7% 7% 2% 3% 2% 2% Other 80% 31% 26% 35% 35% 45% Quad 60%

40% Triple 65% 67% bundles by type (%) type by bundles 56% 57% 49% Distribution ofdiscounted 20% Dual

0% UK England Scotland Wales N Ireland Source: Ofcom research, Quarter 1 2009 Base: All adults aged 15+ with a package of services regardless of whether or not these include a discount (n = 2467 UK, 1508 England, 351 Scotland, 344 Wales, 264 Northern Ireland) QG1. Do you receive more than one of these services as part of an overall deal or package from the same supplier? Note: The figures across the top of the chart represent the total number of homes with any bundle; the chart illustrates the distribution of bundle types among those with a discounted bundle. ‘Other’ includes a small proportion bundles from the dual and triple category.

Figure 1.52 illustrates the distribution of discounted bundles across the nations’ largest cities. Take-up rose as high as 48% in Cardiff and 44% in London. But it stood as low as 19% in Aberdeen and 20% in both Glasgow and Londonderry/Derry.

Figure 1.52 Proportion of individuals taking a discounted bundle, Q1 2009 Proportion of homes/individuals (%)

30 48%

20 44% 37% 37% 31% 31%

10 25% 22% 20% 20% 19% 0 Cardiff Belfast L/Derry London Glasgow Liverpool Swansea Aberdeen Edinburgh Manchester Birmingham 1.5.5 Production of broadcast-based content across the UK

Spend per head on television/radio production was highest in Wales at £57.49

Figure 1.53 illustrates spend per head on broadcast content falling into one of four categories:

59 1. Spend on networked television content produced in each nation.

2. Spend on radio services for listeners in the nations.

3. BBC/ITV1/STV/UTV spend on English language TV content for viewers in a nation.

4. Television programmes produced in Welsh, Gaelic and the Irish language.

It shows that content spend per head across the UK in 2008 totalled £41.50:

 production of English-language television produced by the BBC/ITV1/UTV/STV and targeted at viewers in one of the UK’s four nations accounted for £4.99;

 ‘networked’ TV programmes (broadcast to the whole of the UK) totalled a further £31.21;

 TV output in Welsh, Gaelic and the Irish language added a further £1.45; and

 BBC Radio invested an additional £3.85 in nations-based radio services in English, Welsh and Gaelic.

By nation, patterns of spend varied substantially:

 England attracted the highest volume of networked television spend, at £35.51 per head;

 Northern Ireland viewers benefited from the highest level of spend per head on the production of TV output for viewers in a nation (£16.05) – partly explained by the typically high fixed costs of TV programme production in relation to the comparatively small population; and

 Wales attracted the highest levels of content production per head in a language other than English (£24.38).

Figure 1.53 Spend per head on UK-originated content by PSBs on TV and radio

70 BBC Nations/Local radio 60 £57.49

£11.08 50 £41.50 £41.95 Welsh, Irish and Gaelic television programming 40 £3.85 £2.72 £1.45 £3.72 £4.99 £30.50 £24.38 £31.71 30 BBC/ITV1/STV/UTV spend on £7.76 £11.16 TV content produced in the 20 £2.71 £1.13 £35.51 nation for viewers in that nation £31.21 £10.36 £11.01 10 £16.05 BBC/ITV1/STV/UTV spend on £9.67 £11.02 content produced in the nation 0 £3.38 for a UK-wide audience UK England Scotland Wales N Ireland

Source: Broadcasters and Ofcom calculations

1.5.6 Consumption of broadcast services in the UK’s nations

Consumers across the UK watched an average of 3.8 hours of television per day, and listened to 3.2 hours of radio. TV viewing was most popular in Scotland (at 4.2 hours) and

60 least so in London (3.2 hours); the latter might be explained by the capital’s younger age profile - younger people tend to watch less television. Levels of radio listening varied very little across the four nations.

The five PSB television channels attracted a majority (60%) of viewer hours nationwide. Their popularity varied little among the nations – from 61% in Scotland to 58% in Wales. But there were some substantial variations in England, ranging from 57% in London to 70% in the South West.

There was more variability in the popularity of the BBC’s radio services. They secured a 63% share of listening in Wales, but just 46% in Scotland.

Figure 1.54 Hours of daily television viewing and radio listening, by nation

Hours per person per day

3.8 3.2 3.2 – 4.0 3.2 4.2 3.1 3.3 3.3 3.4 3.2 100% Variation 30% 80% 40% 39% 38% 37% 39% by english 44% 44% 47% 54% region 13%* 60% Non-PSB

40% 60% 61% 62% 63% 61% 56% 57% 56% 53% 46% 20% PSB Proportion of hours (%) hours of Proportion

0% TV Radio TV Radio TV Radio TV Radio TV Radio UK England Scotland Wales N Ireland

Source: BARB and RAJAR Note: PSB television viewing in all homes in Wales includes the share of both S4C and Channel 4. *The 13% represents the margin between the region attracting the highest PSB share (South West, with 70%) and the lowest (London, with 57%).

Viewing TV or listening to radio over the internet most popular in England

In all the UK’s nations, converging technologies are finding favour with consumers, particularly as broadband penetration rises. As a result, a growing proportion of individuals are using the internet to access audio-visual and audio-based services, while mobile handsets are increasingly capable of supporting internet access.

In Q1 2009 over a third of individuals claimed that someone in their household used the internet to watch TV, up by four percentage points year on year. Online viewing was most popular in England, and grew fastest there over the past twelve months (35%, up by six percentage points). Scotland emerged as the nation where internet-based television viewing was least popular – and also in decline (down by nine percentage points year-on-year to 21%). Listening to audio over the internet remained a relatively niche pastime for most listeners in the UK. Overall, 12% of individuals claimed that someone in their home used the web for this purpose, ranging from 13% in England down to just 4% in Scotland.

Around a fifth of people in the UK surfed the web over a mobile handset in Q1 2009 – unchanged since 2008. There was little variation across the UK, although, once again, people in Scotland did this least (14%).

61 Figure 1.55 Consumers’ use of converging platforms

Change year-on-year

+4 -1 0 +6 0 0 -9 -7 -1 +1 -2 +1 +3 -2 -5

20 34 36 33 25 10 20 21 21 13 14 18 18 12 7 7 0 4 TV over internet TV over TV over internet TV over TV over internet TV over TV over internet TV over TV over internet TV over home uses the internet the for following (%) Radio over Radiointernet over Radio over Radiointernet over Radio over Radiointernet over Radio over Radiointernet over Radio over Radiointernet over Proportion ofProportion people who claim someone in their Internet over mobile over Internet Internet over mobile over Internet Internet over mobile over Internet Internet over mobile over Internet Internet over mobile over Internet

UK England Scotland Wales N Ireland

Source: Ofcom research, Quarter 1 2009 Base: All adults aged 15+ (n = 6090 UK, 3437 England, 1014 Scotland, 987 Wales, 652 Northern Ireland) QE12. Which, if any, of these do you or members of your household use the internet for whilst at home?. QD28. Which, if any, of the following activities, other than making and receiving calls, do you use your mobile for?

One in two people in Northern Ireland rely on their mobile for making/receiving calls

Across the UK, the choices that consumers make regarding their main method of calling people vary to some extent by nation. An average of 58% of individuals used their fixed-line telephone as the main method of making and receiving calls. A further 38% relied instead on their mobile phone, with a further 3% citing their fixed line at work.

However, the picture differed in Northern Ireland, where the majority of respondents (52%) mainly used their mobile phone for calls, with a minority (44%) making the same claim about their fixed line. In Scotland, the opposite was true - less than a third cited their mobile, with 64% identifying their fixed line as their principal means of telephony.

62 Figure 1.56 Main means of making telephone calls Proportion of individuals (%)

100% 332 4 3 Unsure

80% 32 Other 38 38 37 52 Internet voice 60% service (VoIP) Public payphone 40% Fixed line at 64 58 58 57 work Mobile phone 20% 44 Fixed line at 0% home UK England Scotland Wales N Ireland

Source: Ofcom research, Quarter 1 2009 Base: All adults aged 15+ (n = 6090 UK, 3437 England, 1014 Scotland, 987 Wales, 652 Northern Ireland) QC28. Which of these do you consider to be your main method of making and receiving telephone calls?

The Communications Market 2008

2 Television

65 Contents

2.1 Key market developments in television 67 2.1.1 UK television industry metrics, 2003-2008 67 2.1.2 TV industry revenue up 1.3% to £11.2bn, but advertising revenues down 68 2.1.3 Nearly nine in ten homes had digital TV at the end of Q1 2009 72 2.1.4 Digital switchover is well under way 73 2.1.5 High-definition television (HDTV) gains traction 74 2.1.6 Channel operators continue to show interest in the Entertainment channel genre 77 2.1.7 Channel licence awards fell in 2008 79 2.2 The television industry 81 2.2.1 Introduction 81 2.2.2 Television industry revenue 81 2.2.3 TV advertising revenues 83 2.2.4 TV shopping accounts for nearly a third of non-broadcast revenue 84 2.2.5 Sports and Entertainment channels generate most multichannel revenue 85 2.2.6 TV industry output 86 2.2.7 UK broadcasters’ content spend passed £5bn for the first time in 2008 87 2.2.8 Television output on the five main PSB channels 88 2.2.9 Multichannel output, by genre 94 2.2.10 The TV production sector 97 2.2.11 Compliance with regulatory quotas 102 2.2.12 Original productions 103 2.2.13 Nations’ and regions’ production outside London 104 2.2.14 Independent productions 108 2.2.15 News and Current Affairs 111 2.2.16 Programmes made for viewers in the nations and English regions 112 2.2.17 Repeats 114 2.2.18 European programming 115 2.2.19 Other compliance matters 116 2.3 The television viewer 119 2.3.1 Summary 119 2.3.2 Availability of multichannel broadcast platforms 119 2.3.3 Digital TV take-up 120 2.3.4 Consumption of television services across the day 124 2.3.5 Channel reach 126 2.3.6 Viewing share among the five main PSB channels 128 2.3.7 Multichannel broadcaster share 132 2.3.8 Consumer attitudes toward television 143

66 2.1 Key market developments in television

2.1.1 UK television industry metrics, 2003-2008

UK television industry 2003 2004 2005 2006 2007 2008

Total TV industry revenue (£bn) 9.2 10.0 10.5 10.6 11.1 11.2

Proportion of revenue generated by public funds 26% 24% 25% 25% 25% 24%

Proportion of revenue generated by advertising 34% 35% 35% 33% 32% 31%

Proportion of revenue generated by subscriptions 35% 34% 35% 36% 37% 39%

TV as a proportion of total advertising spend 30.2% 29.6% 29.6% 27.9% 26.9% 26.5%

Spend on originated output by 5 main networks (£bn) 3.1 3.1 3.0 2.8 2.7 2.6

DTV take-up (% of homes in Q1) 43.2% 53.0% 61.9% 69.7% 86.3% 87.1% (Q1 2009 89.2%)

Proportion of DTV homes paying for TV (Q1) 80.2% 71.7% 64.3% 60.0% 55.0% 53.1%

Viewing per head, per day (hours) in all homes 3:44 3:42 3:39 3:36 3.38 3.45

Share of the five main networks in all homes 76.5% 73.8% 70.4% 66.7% 63.5% 60.8%

Number of channels broadcasting in the UK 294 379 416 433 470 495

This section explores developments and trends in the UK television market. Some of the key findings are:

 Television industry revenue grew by 1.3% to reach £11.2bn in 2008. Pay-TV subscriptions rose by 6% but total net advertising revenue fell by 3%, as broadcasters began to feel the impact of the recession. The proportion of the BBC’s licence fee revenue spent on television decreased by 1.2% year on year to £2.6bn (page 68).

 Advertising growth slows for independent multichannel broadcasters. The commercial portfolio channels of the PSBs accounted for the majority of growth in multichannel advertising (£77m out of £79m) in 2008. Advertising revenue from the rest of the multichannel sector rose by just £2m in 2008 to reach £810m (page 72).

 Digital television take-up reached 89.2% at the end of Q1 2009. It increased by 2.1 percentage points year on year. Nearly nine million digital video recording devices (also known as ‘digital television recorders’ or ‘personal video recorders’) had been sold by the end of Q1 2009 (page 72).

 Digital switchover is now well under way and Exeter in the West Country became the UK’s first ‘digital city’ in May 2009. Digital switchover in Scottish Borders was completed in November 2008 and 20% of homes across the UK will have had their analogue terrestrial television signals switched off by the end of 2009 (page 73).

 High-definition (HD) television gains traction. By the end of Q1 2009, 2.3 million homes had HD reception equipment – either a set-top box or an integrated digital television – capable of accessing linear or on-demand HD content. Some broadcasters are now evaluating the potential of 3DTV (page 74).

67  Entertainment channels (excluding the five main PSBs) accounted for one in five hours of viewing in multichannel homes in 2008. The Entertainment genre’s aggregate viewing share (excluding the five main PSBs) grew by 1.8 percentage points in 2008 to account for a 21.3% share in multichannel homes (page 77).

 The number of television channel licences awarded by Ofcom decreased year on year. The appetite to launch new channels appears to be waning in the UK, with 495 channels already on-air at the end of 2008, up from 470 in 2007. Seventy-seven licences were issued by Ofcom in 2008, down by 46%, and the lowest number issued since 1998 when digital television launched in the UK (page 79).

We now examine these stories in more detail.

2.1.2 TV industry revenue up 1.3% to £11.2bn, but advertising revenues down

UK television industry revenue rose by 1.3% (£145m) to £11.2bn in 2008; this compared to a 7.4% increase in 2007 and the five-year annualised average of 5.9% (Figure 2.1).

Subscription revenue raised by pay TV operators continued to be the engine of growth in 2008, with income rising by 6% or £245m over the year. This was driven both by new subscribers and by higher per-subscriber revenue prompted by new value-added services such as Sky+ HD. ‘Other’ sources of income such as sponsorship, retail and revenue from interactive services rose by 5% (£36m) over the same period.

A reduction in television advertising revenue driven by the deteriorating economic environment offset these increases, falling by 2.9% (£105m) year on year, compared to a 3.3% increase in 2007 and a five-year annualised average of 2.3%. Licence fee spending on television services also fell by 1% or £31m in 2008, to £2.6bn.

The overall £105m reduction in NAR during 2008 was driven by an 8% (£183m) reduction in commercial PSB advertising, partly offset by increasing multichannel advertising revenue (up £79m). The lion’s share of that increase was generated by the commercial PSBs’ portfolio channels14, boosting their advertising revenue by 20% year on year. The remaining multichannel broadcasters attracted just £2m in additional advertising income over 2008.

14 The PSB portfolio channels are the multichannel services owned by the main PSBs.

Figure 2.1 Changes in television industry revenue, 2007 - 2008 Revenue (£m) 11,400

+5%

+6% £36m £31m 11,300 -1%

£183m +0.2% +1.3% 11,200 +20% £245m £2m £77m

11,100 -8% £11,197m

£11,052m 11,000 2007 Subscriber Other Licence fee PSB NAR PSB Other NAR 2008 revenue revenue portfolio revenue NAR Source: Ofcom/broadcasters Note: Figures expressed in nominal terms. PSB NAR comprises ITV1 (including GMTV1), Channel 4, Five and S4C. PSB portfolio NAR includes the commercial channels owned by the PSBs. ’Other NAR’ comprises the rest of the multichannel market. Platform operator revenues do not include any installation costs, equipment sales or subsidies.

Figure 2.2 illustrates how TV advertising revenue by broadcaster has trended over the last two years. ITV1 and Channel 4 both experienced revenue reductions of over 8% over the year; Five’s advertising income fell by more than 5% over the same period. GMTV was the only one of the commercial PSB licensees to benefit from advertising revenue growth during 2008 – up by 1% in twelve months.

Figure 2.2 Net advertising revenues

1-year growth (%)

£3,576m £3, 471m -2.9% 4,000 £54m £55m 1.3% GMTV1 £287m £272m £380m 3,000 £457m -5.4% Five £680m £623m 16.8% PSB portfolio channels

£m 2,000 £808m £810m -8.2% Channel 4

1,000 0.2% Other multichannels £1,365m £1,253m ITV1 0 -8.9% 2007 2008

Source: Ofcom/broadcasters Note: Totals may not equal the sum of the components due to rounding.

The UK broadcasting sector is facing a range of structural and cyclical challenges. The mainstream commercial broadcasters in particular announced a number of cost-control initiatives during 2008/09 including:

69  ITV said it would cut 600 jobs in March 2009, on top of 1,000 it announced in early 2008. This followed a pre-tax loss of £2.73bn for 2008. The broadcaster also said that investment in network programming would be reduced by £65m in 2009. ITV announced its intention to explore the sales of its Friends Reunited website and the DTT multiplex operator SDN. The broadcaster said that it would deliver total cost savings of £155m in 2009, rising to £175m in 2010 and £245m in 2011. It also moved to re-engineer its schedule to place a greater emphasis on entertainment shows. Production beyond 2009 of drama series Heartbeat and The Royal was suspended, although episodes had been stockpiled. In July, police drama The Bill moved to one episode a week (down from two nights per week).

 Channel 4 headcount’s was reduced by more than a third to around 700, as part of efforts to reduce its cost base by £125m. This saw the broadcaster lower its programming budget by £40m to £620m. Channel 4 also withdrew from a consortium to run the UK’s second national digital radio (DAB) multiplex. Phase 2 of Ofcom’s review of public service broadcasting said that by 2012, Channel 4 could require further funding of £60m to £100m a year in order to continue to deliver its existing remit.

 In March 2009, commercial broadcaster Five announced that up to 87 jobs would be lost from the company’s 354-strong workforce. It is investing more in its peak-time schedule where it is aiming for programmes which can draw audiences of more than a million viewers. Five also announced plans to drop talk show Trisha as part of a strategy to move resources to parts of the schedule that made better commercial returns.

Partnerships and policy aim to secure the future of public service broadcasting

In January 2009 Ofcom issued a statement about the future of public service broadcasting and how to ensure the delivery of content that fulfils public purposes and meets the interests of citizens and consumers throughout the UK.15 During this process, in December 2008, the BBC announced a proposal to develop a set of partnerships to deliver commercial PSB savings of £120m per year by 2014. Talks on these proposals were continuing at the time of writing. These included initiatives such as:

 the creation of a public service iPlayer (also known as Marquee) open to ITV, Channel 4 and Five;

 bringing internet services to the television through Project Canvas, an open standard IPTV platform which is being reviewed by the BBC Trust;

 sharing regional news footage and premises where appropriate to support provision beyond the BBC;

 options for other PSBs to collaborate with BBC Worldwide (talks have progressed with Channel 4);

 using the bbc.co.uk website to promote broadband take-up and other PSB content on the internet; and

 sharing research and development resources.

15 http://www.ofcom.org.uk/consult/condocs/psb2_phase2/statement/

70 In March 2009, the BBC, which is funded by the licence fee, also announced plans to save £400m over three years and pledged to reduce the salaries of ‘top talent’.

An Ofcom-approved reduction in the number of ITV news regions (from 17 to nine) was implemented in early 2009, releasing savings of £40m per year. The Government’s Digital Britain report, published in June, introduced a proposal to pilot several independently-funded local news consortia as a long-term replacement for ITV local news services (see below).

The Digital Britain report also suggested that a proposed partnership between Channel 4 and BBC Worldwide was its preferred option to help secure the future of Channel 4. The report said that the two parties should further explore the potential partnership, to create a second public service broadcaster of scale. An announcement by Channel 4 and BBC Worldwide was expected imminently at the time of writing.

The Digital Britain report also focused on wider aspects of the future of public service broadcasting, and left open the prospect of a ‘contained contestable element’ of the BBC’s licence-fee revenue, which could be used for public service content such as local news.

Digital Britain proposes pilots for local news consortia Consumer research conducted as part of Ofcom’s second review of public service broadcasting found that people value regional television news, but the current system faces a number of challenges. In Ofcom’s Second Public Service Broadcasting Review: Putting Viewers First, we showed that viewers believe that news is the main priority for nations and regions television. But there are cyclical and structural pressures on the commercial providers of nations/regions news.

As we set out in the PSB Review, there is a tension between ITV plc’s desire to reduce regulatory burdens and its ongoing ability to maintain investment in public service programming. This tension is becoming more acute as switchover completes and digital distribution becomes widespread. If regional/nations news is to continue beyond the BBC, provision of additional funding may be necessary. To address these challenges, The Government’s Digital Britain outlined its intentions to pilot independently funded news consortia (IFNCs).

IFNCs could bring together interested parties which would provide a more ambitious cross- media proposition and enhanced localness compared with current commercial television regional news. However, in order to maximise audience reach and impact, they would also broadcast in the regional news slots in the schedule of current Channel 3 licensees. Consortia would include but not be limited to existing television news providers, newspaper groups or other newsgathering agencies. IFNC funding would be awarded on a contestable basis and against a set of public criteria to maximise public value.

The Digital Britain report announced three pilot IFNC projects - in Scotland, Wales and one in England. Further details on the proposal can be found on page 156 on the report: http://www.culture.gov.uk/images/publications/digitalbritain-finalreport-jun09.pdf. The DCMS is currently consulting on the importance of plurality in regional news and the potential sources of top-up funding. Details on the consultation can be found at: http://www.culture.gov.uk/reference_library/consultations/6245.aspx.

71 Advertising growth slows for independent multichannel broadcasters

The UK’s multichannel television sector continued to grow in 2008 as revenues increased by 5.9% to reach £1,754m. The increase was largely fuelled by a rise in advertising revenue of 6.2%, to £1,267m.

However, the majority of this (£77m) was driven by the PSB portfolio channels. Just £2m of the 2008 growth went to other multichannel broadcasters. Figure 2.3 illustrates that NAR earned by the commercial PSB portfolio channels has been the fastest-growing component of multichannel revenue in recent years, increasing more than four-fold between 2004 and 2008.

Figure 2.3 Multichannel revenue by source: NAR and other revenue

£1,287m £1,300m £1,477m £1,650m £1,754m 900 800 Commercial 808 810 700 772 multichannels' 695 695 NAR 600 493 487 Other 462 500 437 435 multichannel m £ 400 457 revenue PSB portfolio 300 380 channels's NAR 200 270 100 168 99 0 2004 2005 2006 2007 2008

Source: Ofcom/broadcasters

Concurrent with a relatively subdued year for the non-PSB multichannel sector, some channel groups took steps to control costs. Channels including VMTV’s Trouble and Turner Broadcasting’s Nuts TV were closed. Real Estate TV, the property-based factual broadcaster owned by Fox International Channels, also closed, against a backdrop of a slowing property market.

Perhaps the biggest closure among channel operators was the UK business of Setanta Sports, the broadcaster that had acquired key sports rights such as FA Premier League and FA Cup football. The company went into administration in June 2009, following its failure to make payments on sports rights. The 46 Premier League games that Setanta had held for the 2009/10 season, and the 23 games per year for three seasons from 2010, were subsequently acquired by sports broadcaster ESPN.

Pay-TV broadcaster BSkyB also made cuts, announcing 250 job losses in August 2008. In November 2008, Virgin Media said that 2,200 jobs, about 15% of its workforce, would be lost by 2012.

2.1.3 Nearly nine in ten homes had digital TV at the end of Q1 2009

Digital television (DTV) take-up in the UK reached 89.2% at the end of Q1 2009, an increase of 2.1 percentage points year on year. This means 22.8 million homes now receive DTV on their main set.

Digital terrestrial television (DTT) remained the most widely-used service on main sets, accounting for around 9.8 million (38.5%) homes in Q1 2009, an increase of 200,000 (0.5

72 percentage points) over the year. Freesat, the free-to-air digital-satellite television platform owned by the BBC and ITV, had attracted 300,000 customers by the end of the first quarter of 2009. Freesat launched in May 2008 and offers more than 140 subscription-free digital channels as well as high-definition channels from the BBC and ITV.

While Freeview provided the bulk of digital growth between 2004 and 2007, the contributions of the three main platforms – DTT, satellite and cable – evened out in 2008 as DTV take-up slowed.

Figure 2.4 Multichannel television take-up

% of homes 27.2% 34.0% 41.7% 44.7% 48.0% 56.7% 64.9% 71.8% 80.3% 87.2% 89.6%

TV Households (m) 26 Analogue 24 terrestrial only 22 Digital 20 terrestrial only 18 16 Analogue 14 cable 12 Digital cable 10 8 Free-to-view 6 digital satellite 4 2 Analogue 0 satellite Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Pay digital 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 satellite

Source: Ofcom, GfK, Sky and Virgin Media Note: Digital terrestrial relates to DTT-only homes. Please note we have not included homes receiving overseas satellite services as part of the multichannel total throughout the report, as these homes may be receiving the main PSB channels via a digital platform.

Seventy-three per cent of all TV sets had converted to multichannel television by the end of Q1 2009 (up 5.7 percentage points on a year ago and up by 0.8 percentage points quarter on quarter). As the market for DTV on main sets begins to saturate, television platform operators and consumer electronics manufacturers are enhancing the functionality of digital reception devices. Nearly nine million digital video recorders (DVRs) had been sold by the end of Q1 2009, of which five million were BSkyB’s Sky+ and Sky+ HD devices.

2.1.4 Digital switchover is well under way

Exeter in the West Country became the UK’s first ‘digital city’

Switchover in the Scottish Borders, which began when Whitehaven became the first town to make the transition in October 2007, was completed in November 200816. Since then, Exeter in Devon became the first UK’s first ‘digital city’, making the switch to digital-only terrestrial broadcasting on May 20, 200917. In total, 757,000 UK households have now had their analogue terrestrial signals switched off. By the end of 2009 around 19% of homes will have switched over (Figure 2.5).

16 http://www.digitaluk.co.uk/__data/assets/pdf_file/0019/23275/20-11-08_switchover_completed.pdf 17 http://www.digitaluk.co.uk/__data/assets/pdf_file/0011/27929/20-05-09_stockland_hill_dso2.pdf

73 The biggest switch to come in 2009 (as measured by the number of households affected) will be in the Granada region, covering the north-west of England including Liverpool and Manchester. In November and December 2009, 3.04 million households receiving analogue television signals from the Winter Hill transmitter will move fully to digital television services. Switchover will continue in other areas through 2010 and 2011 and finish in 2012. The Crystal Palace transmitter, which covers 4.86 million households including all those in London and the surrounding areas, will be one of the last to switch and will be the largest single switch in the programme.

Figure 2.5 UK households and switchover dates

Year Number of Proportion of total Areas switching homes UK households switching in the switched year 2007/2008 73,000 0.3% Copeland and Scottish Borders

2009 4,811,000 18.6% West Country, Scottish Border, Wales and Granada 2010 2,257,000 27.3% Parts of Scotland, Channel Islands and west England

2011 10,454,000 67.3% Anglia, Central, Yorkshire and Scotland

2012 8,552,000 100% Meridian, London, Tyne Tees and Ulster

Source: Ofcom

Virgin Media will become the second television platform to turn off all analogue distribution during 2009, releasing a third of its network capacity. This could be used for services such as next-generation broadband and HDTV, according to the company. Virgin Media had 141,200 analogue TV customers at the end Q1 2009; BSkyB switched off its analogue satellite services in September 2001.

2.1.5 High-definition television (HDTV) gains traction

Consumers show a growing appetite for HD as more content becomes available

High-definition (HD) television services have gained popularity with UK consumers, as new HD channels have launched and as more platforms offer HD content to consumers. By the end of the first quarter of 2009, nearly 1.9 million UK homes (7%) had HD-receiving equipment capable of viewing high-definition broadcast channels, either through a set-top box or an integrated digital television set (IDTV). Just over a million of these were Sky+ HD, with Virgin Media’s V+ and Freesat HD boxes and IDTVs accounting for around 900,000 (Figure 2.6). Taking account of BT Vision, which offers some HD programming on-demand, the number of homes able to access to HD television content rose to around 2.3 million (9%) at the end of March 2009.

74 Figure 2.6 Number of broadcast HD homes: BSkyB, Virgin Media and Freesat

1,200 1,022 1,000 Sky+ HD homes

779 800

591 V+ homes 600 498 465 612 Homes (000's) Homes 422 358 522 400 292 467 244 425 263 184 364 172 Freesat HD 200 38 96 262 73 167 190 24 79 150 0 40 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009 Source: Operators

The broadening appeal of HD in 2008 was evidenced not only by the growing consumer take-up of HD decoders, but also by changes in the pricing of HD propositions and by the growing range of channels offering high-definition content.

In January, BSkyB dropped the price of its Sky+ HD box by £100 to £4918 and embarked on a major marketing campaign to promote the product. BSkyB has the largest base of HD customers and is the only platform to offer a bespoke subscription package of HD channels. At the end of Q1 2009, it had just over one million subscribers to its £9.75 a month HD package. BSkyB offers 33 HD channels, up from nine at launch in 2006, covering key genres such as Sports, Films, Entertainment and Factual. The company has said that it plans to launch Sky News HD in spring 2010.

Virgin Media, which has the second largest number of HD-compatible receivers in the market, offers more on-demand content than linear in HD (just BBC HD). The cable operator has said that four channels - Living HD, FX HD, MTVN HD and National Geographic HD – will launch on cable, with the first being available to V+ customers from the end of July.

Freesat from the BBC and ITV offers BBC and ITV HD services. About three-quarters of Freesat equipment sold, which includes set-top boxes and integrated digital television sets (IDTVs), were capable of receiving high-definition television. The BBC also offers some HD content online on its iPlayer service, which can be streamed, depending on the speed of the internet connections, or downloaded to computers.

Looking ahead, consumers will soon be able to receive HD channels from the BBC, ITV and Channel 4 on the Freeview platform. The first HD broadcasts on DTT will go live on 2 December 2009 from the Winter Hill transmitter serving Liverpool and Manchester. HD signals will also be available from the Crystal Palace transmitter in London from December.

HD on Freeview will be available to 60% of the UK by Christmas 2010. Viewers who wish to watch HD on Freeview will need reception equipment which incorporates MPEG-4 compression and DVB-T2 transmission technologies, as well as a HD-ready television set.

18http://corporate.sky.com/file.axd?pointerid=221aa60ce8cc4089a7eb126b6c09c7e1&versionid=2835 e0f11bd840da914f7b3b230ea56c

75 Figure 2.7 Comparison of high-definition TV services

Platform Provider Launch date HD content available Number of HD homes at Q1 2009 Satellite BSkyB April 2006 33 linear channels covering key genres. 1,022,000 Third-party channels include BBC HD, (Sky+ HD) Channel 4 HD, Discovery HD, MTVN HD and Eurosport HD Satellite Freesat May 2008 BBC HD channel and ITV content 263,000 accessed via red button (Freesat HD) Cable Virgin December 2005 BBC HD channel. 100 hours of HD on- 611,900 Media demand programmes plus 30 HD on- (V+) demand movies are available (new channels planned from July 2009) IPTV BT Vision September Films from Universal, which are 423,000 2008 downloaded via IPTV to BT Vision box, (Vision +) are available in HD Online BBC April 2009 Major BBC programming available in HD - to stream and download. DTT Freeview Planned from Channels available at launch will include - late 2009 in BBC, ITV and Channel 4. Five has been selected awarded a fourth licence subject to regions* meeting certain conditions

Source: Ofcom, company data (correct as of July 2009) Note: *Granada region will be the first to launch HD on Freeview on 2 December 2009. Freeview HD will employ DVB-T2, a next-generation transmission technology, which could offer bandwidth efficiencies of up to 50%19.

While 2.3 million homes have receivers capable of decoding HDTV, a much larger number have now acquired the television equipment necessary. Cumulative sales of HD-ready sets had reached 17.6 million HD-ready by Q1 2009 (Figure 2.8). Our research found that 33% of television homes claimed to have a HD-ready television set at the end of 2008.

Figure 2.8 HD-ready TV sets: sales

HD ready sets as % of all sets sold 3,500 100% Thousands of sets sold 90% 3,000 % of all sets sold 80% 2,500 70%

2,000 60% 50% 1,500 40% 1,000 30% 20% 500 10% 0 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009

Source: GfK

19 http://www.dvb.org/news_events/dvbscene_magazine/DVB-SCENE27.pdf

76 3DTV comes into focus The resurgence of 3D feature films such as Bolt and Ice Age 3 in the cinema appears in part to have fuelled renewed interest in 3DTV from content producers. With improvements in technology, stereo 3D images can now be delivered in a way that is far more satisfactory to viewers than previous attempts at conveying depth.

The original 3D films, and some recent 3D DVD releases, used red and blue colour tints on two overlaid images intended for left and right eye. The left- and right-eyed views are seen by the correct eye when viewed through glasses with similarly-tinted lenses. This two- colour anaglyph technique was invented in the days of black-and-white film. But colour reproduction is affected by this technique, and, in addition to the other alignment errors, it resulted in many viewers experiencing headaches.

Current 3D technologies still require glasses, so are still mostly only suitable for ‘appointment-to-view’ programming. Glasses-free 3D ‘autostereoscopic’ displays are under development but are believed to be 5-10 years away from deployment. Current techniques rely on the use of special polarising filters, to deliver the left- and right-eye images on to a screen, so that a viewer with matching 3D-polarising glasses will see the correct image with each eye.

There are currently two different ways of displaying 3D on a TV screen. One interleaves the two images on a line-by-line basis; the other alternates left and right eyed views (frames). The latter type requires the use of electronic ‘shutter’ glasses which are quite heavy, and cost more than the simple polarising glasses used by the line-interleaved displays. It may be possible to view 3D using a few existing TV sets, and with some video projectors, using an external adaptor, but most people will need a new television. 3D video can be delivered using a variety of standards - around fourteen at the last count.

A few broadcasters, including BSkyB in the UK, are starting to experiment with 3DTV. It is possible to deliver 3DTV using a standard HDTV channel (although the broadcasts are not compatible with standard 2DTV sets). BSkyB has demonstrated 3D productions of programming genres including sport, entertainment, arts and live music. The current experiments appear to be aimed at gaining production experience, building a 3D programme library and convincing TV equipment manufacturers that there will be a viable market for 3D TV equipment.

2.1.6 Channel operators continue to show interest in the Entertainment channel genre

The aggregate audience share of the multichannel Entertainment genre continued to grow steadily in 2008, maintaining its position as the largest genre category as measured by viewer hours. The Entertainment category includes channels – such as ITV2, Sky 1 and Hallmark - that show a broad mix of programme genres and which are carried in the ‘Entertainment’ sections of the electronic programme guides (EPG) of Sky Digital and Virgin Media.

The proportion of all viewer hours taken by this channel category increased by over a third between 2003 and 2008 to 21% of all hours in 2008 (Figure 2.9). This excludes the five main terrestrial entertainment channels – BBC One, BBC Two, ITV1, Channel 4 and Five - which together accounted for a further 56% of viewer hours in multichannel homes. The figures along the top of the chart (Fig. 2.12) show the aggregate viewing shares, in multichannnel homes, of the five main PSB channels over the five-year period.

77 Figure 2.9 Channel genre analysis in multichannel homes Audience share Non-PSB share of viewing 42.8% 42.5% 42.3% 42.5% 43.3% 44.0% 100% 3.6% 3.8% 4.2% 4.2% 4.2% 4.0% 1.3% Other genres 2.6% 2.7% 2.5% 1.7% 1.4% 1.2% 2.1% 1.2% 1.3% 1.4% 1.4% 1.9% 1.8% 1.6% Lifestyle and 80% 1.9% 2.9% 2.8% 2.3% 2.4% 2.2% Culture 2.4% 2.6% 3.2% News 2.3% 3.4% 3.3% 3.6% 3.2% 3.4% 4.0% 3.8% 60% 3.7% Music 4.4% 4.3% 4.1% 5.9% 5.8% 5.7% Documentaries 5.9% 6.4% 40% 6.1% Movies

Sport 21.3% 18.3% 19.5% 20% 16.1% 14.8% 15.2% Childrens Entertainment 0% 2003 2004 2005 2006 2007 2008

Source: BARB

Much of the category’s growing popularity has been driven by PSB portfolio channels (BBC Three, ITV2, E4 and Fiver, for example). This is in part explained by their presence on Freeview, the most widely-used digital television platform, where take-up has risen rapidly over the last five years. The PSB portfolio channels in the Entertainment share of viewing rose from 3.7% in 2004 to 11.4% in 2008; as such, they accounted for over half of the genre's share in 2008. The remaining channels in the Entertainment category have broadly maintained their share over the last five years, shedding one percentage point to 10% in 2008.

Other channel operators have sought to capitalise on the popularity of the Entertainment genre during 2008. Two trends have emerged:

First, non-PSB multichannel operators rebranded their channel portfolios in 2008, with an emphasis on carrying a broader spectrum of content, targeting a specific audience rather than a genre. The best example of this approach came from UKTV. Capitalising on the impact of Dave’s launch in 2007, UKTV re-branded other Entertainment channels in a possible effort to replicate the increases in audience seen by Dave: UKTV Drama was renamed Alibi and UKTV Gold was replaced by two separate services: Watch, a general entertainment channel and G.O.L.D, focusing on British sitcoms.

Second, new Entertainment services were launched by traditionally genre-specific broadcasters, such as Discovery and MTV. The latter launched its first channel outside the music category: MTV R in November 2007 while Discovery launched DMax in January 2008. Over 2008, MTV R accounted for 11% of MTV’s channel share, while DMax accounted for 12% Discovery’s overall portfolio of viewer hours.

78 Figure 2.10 Changes in genre share, multichannel homes: 2003 - 2008 Change in share (percentage point)

6% -1.39% 5% -1.34% 4% -0.98% 3% 6.49% -0.81% 2% -0.74% -0.33% 1% -0.20% 0.43% -1.13% 0% Entertain. Lifestyle Music Sport Movies News Docu. Childrens Other PSBs

Source: BARB

2.1.7 Channel licence awards fell in 2008

Seventy-seven television channel licences were issued by Ofcom in 2008, significantly down from 143 in 2007 (Figure 2.11). Overseas licences accounted for a greater proportion of the new licences, making up 35 (45%) of the total in 2008, compared to just 18% twelve months earlier. Our research found that there were 495 channels broadcasting in the UK at the end of 2008 (excluding regional variations and pay-per-view film channels), up from 470 in 2007 and 433 in 2006.

Figure 2.11 Television channel licences issued

Number of licences issued

200

150 25 Overseas 36 licences 26 12 17 100 UK licences 143 134 126 109 114 120 109 117 35 50 93 50 50 29 33 43 42 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Ofcom. Note: For years prior to 2003, no distinction is made between UK licences and overseas licences

While licence awards do not equate to the number of new channels that have gone on-air, they do offer an indication of the industry’s appetite to launch new channels. A number of factors could have contributed towards the reduction in UK licences issued:

 BSkyB ceased to accept applications for places in the launch queue for the digital satellite platform in October 2007, owing to potential memory constraints in older-

79 generation set-top boxes. However, channels already in the launch queue, and broadcasters prepared to buy slots on the EPG from other companies, were able to gain access to the platform. In early 2009, BSkyB opened a consultation on allowing additional high-definition channels to launch, as HD receivers do not have such memory limitations.

 The market may be reaching a point of maturity, or even saturation, which makes it less economic for new services to launch (there were around 495 television channels broadcasting at the end of 2008, double the number of channels in 2001). Multichannel advertising revenues, excluding those of the PSB portfolio channels, rose by just £2m in 2008 to £810m (and up from £695m in 2004). The economic environment specific to 2008 could have had some bearing on operators’ willingness to launch new channels (and thereby apply for a new licence).

 Some broadcasters have taken steps to rationalise or re-focus their channel portfolios. Rather than launching new channels, some operators have repositioned existing services. For example, Virgin Media Television closed its Trouble channel and replaced it with a Living TV time-shift, while UKTV has continued to re-brand many of its channels – a process that was started before the recession.

Figure 2.12 UK channel licence awards, by genre, 2007 - 2008

Total UK licences issued: 42 (2007: 117) 40 34

30 24

88 8 9 2007 2008 10 6 6 7 6 4 4 5 5 3 2 3 2 3 2 3 0 2 1 1 1 1 001 0 HD Adult Films Sport News Musi c Self Factual User- Religious Shopping Children's promotion Interactive generated Multicultural Entertainment Source: Ofcom. Note: Chart includes only those channels granted UK licences.

The declining numbers of licence awards were reflected in all the major channel categories in 2008. Eight Entertainment channels were licensed in 2008, down by two-thirds in a year; Multicultural channels, another fast-growing category in 2007, saw a drop from 34 to eight awards. High-definition television channels, which have experienced significant growth in recent years, accounted for two of the 42 licences, down from five out of 117 in 2007. No UK Sports channels were licensed in 2008, compared to nine the previous year, while one Adult channel licence was granted, a reduction on the five issued in 2007.

80 2.2 The television industry

2.2.1 Introduction

In this section we analyse the financial dynamics of the UK television industry, breaking down revenue by the different sources in the market and highlighting key trends. We also examine broadcasters’ hours of output, spend on programming and compliance with quotas.

Key points in this section include:

 The UK television industry recorded revenues of £11.2bn in 2008, an increase of £145m (1.3%) on 2007. A declining advertising market, down 3% to £3.47bn, was offset by increasing subscription revenues from pay-TV platforms, which grew by 5.7% to £4.32bn (page 82).

 Broadcasters’ spend on programming passed £5bn for the first time. Spend on the five main PSB channels increased by £59m year on year to reach £2.8bn. Investment in programming for Sports and Film channels (the majority of which is the cost of acquiring rights), increased by £33m year on year to £1.2bn (page 88).

 The independent production sector grew at a much slower rate in 2008, generating revenue of £2.2bn, an increase of 1% year on year. TV income contributed £1.9bn of the total (88%), of which primary TV rights continued to be the main revenue source at £1.4bn (page 97).

 Television channels broadcast nearly 2.5 million hours of programming in 2008 of which 5% were first-run originations. Of the 42,792 hours broadcast by the five main network PSB channels in 2008, nearly half (49%) were first-run originations (page 85).

 Most of the obligations placed on PSBs, in terms of compliance with programme quotas, were met in 2008. In some areas, such as quotas for original productions and independent programmes, targets were comfortably exceeded, although ITV1 narrowly missed the quota for the value of regional production outside London in 2008 (page 102).

2.2.2 Television industry revenue

The UK television industry generated revenue of £11.2bn in 2008

The UK television industry generated £11.2bn of revenue in 2008, an increase of £145m (1.3%) on 2007. The increase masked a trend of falling television advertising revenue, which declined 3% year on year to reach £3.47bn, offset by rising subscriber revenue.

Subscription revenues across pay-TV platforms increased by 5.7% in 2008 to reach £4.32bn, accounting for 38.5% of industry revenues, up from 36.9% in 2007. Net advertising’s share of total television revenues fell from 32.4% to 31.0% over the same

81 period. Rising subscriber revenue and reductions in the value of television advertising sales in 2008 led to a widening gap between the two to £849m, compared to £499m in 2007.

Platform operators continued to grow revenues, as the pay-TV subscriber base increased and greater numbers of customers took multiple television products such as video-on- demand, multiroom and high-definition television.

Ofcom estimates that the BBC licence-fee revenue spent on television decreased by 1.2% year on year to just below £2.6bn in 2008. It accounted for just less than a quarter of all television industry revenue (23.1%).

Broadcasters managed to reverse the decline in ‘other’ revenue seen in 2007. Other revenue - from a variety of sources such as shopping, pay-per-view, sponsorship, programme sales and S4C’s grant from the DCMS - increased by £36m (4.2%) year on year. Other revenue stood at £816m, accounting for 7.3% of the industry total in 2008, up marginally from 7.1% in 2007.

Figure 2.13 Total TV industry revenue, by source

Growth Revenue (£m) 1 year 5yr CAGR £9,177£9,955 £10,471 £10,619£11,052 £11,197 1.3% 4.1% 5,000 4,320 4,075 6.0% 6.9% Subscriptions 4,000 3,699 3,795 3,410 3,242 3,615 3,576 3,462 3,471 -2.9% 1.4% Net advertising 3,000 3,099 3,481 revenue

2,622 2,591 2,433 2,525 -1.2% 2.4% Licence fee 2,319 2,000 2,302 allocated to TV

4.6% 8.9% Other 1,000

746 724 837 780 816 534 0 2003 2004 2005 2006 2007 2008

Source: Ofcom/broadcasters Note: Figures expressed in nominal terms and replace previous Ofcom revenue data for TV industry, owning to restatements and improvements in methodologies. ‘Subscriptions’ includes Ofcom’s estimates of BSkyB, Virgin Media, BT Vision, Setanta Sports and Top Up TV television subscriber revenue in the UK (Republic of Ireland revenue is excluded). It also excludes revenue generated by broadband and telephony. ‘Other’ includes TV shopping, sponsorship, interactive (including premium- rate telephony services), programme sales and S4C’s grant from the DCMS. The licence fee figure for 2006 has been re-stated owing to a change in the way the BBC reported its figures, which allocates a greater proportion of overheads to specific services. Totals may not equal the sum of the components due to rounding.

Pay TV operators generated revenues of £4.3bn in 2008, an increase of 6% on 2007.

Commercial analogue channels, which include the commercial PSBs, generated revenue of £2.4bn in 2008, a 7% fall from 2007. Revenue for the commercial multichannel broadcasters increased 6% year on year to nearly £1.8bn, driven in large part by increased advertising revenues from the PSB portfolio channels. The revenue for publicly-funded channels, which includes the part of the BBC licence fee that is dedicated to television and S4C’s grant from the DCMS, fell 0.9% year on year to £2.7bn.

82 Figure 2.14 Total TV industry revenue, by sector

Growth Revenue (£m) £9,177£9,995 £10,471 £10,619 £11, 052 £11, 197 1.3% 4.1% 12,000 6.0% 6.9% Platform operators 10,000 4,075 4,320 3,699 3,795 8,000 3,410 3,099 6.3% 11.8% Commercial multichannels 6,000 1,300 1,477 1,650 1,754 1,005 1,287 -7.0% -2.0% Commercial analogue 4,000 2,844 2,906 2,725 2,603 2,420 2,677 channels 2,000 2,396 2,414 2,566 2,622 2,725 2,702 -0.8% 2.4% Publicly-funded 0 channels 2003 2004 2005 2006 2007 2008

Source: Ofcom/broadcasters Note: Figures expressed in nominal terms. Commercial analogue channels comprise ITV1, Channel 4, Five and S4C. Commercial multichannels comprise all commercial channels other than ITV1, Channel 4 and Five. Publicly-funded channels comprise BBC One, BBC Two, the BBC’s portfolio of digital-only television channels and S4C. S4C is listed under publicly-funded and commercial analogue channels because it has a mixed advertising and public funding model. The publicly-funded channels figures for 2006 and 2007 have been restated due to a change in the way the BBC reported on the deployment of licence fee income. Totals may not equal the sum of the components due to rounding.

2.2.3 TV advertising revenues

The television sector experienced a fall in net advertising revenues (NAR) in 2008, as rising commercial multichannel advertising failed to offset reductions in NAR across the four commercial PSBs: ITV1, GMTV1, Channel 4/S4C and Five.

NAR totalled £3.47bn in 2008, down by 3% in twelve months. The four commercial PSB channels saw advertising revenues fall by 8.3% to £2.2bn. Commercial multichannel broadcasters generated net advertising revenues of £1.3bn in 2008, up from £1.2bn in 2007. The majority of this growth was driven by the portfolio channels of the PSBs, which generated £457m of NAR in 2008, up 16.9% or £77m on 2007. This offset losses on the parent services to some extent, taking their total NAR to £2.66bn in 2008, down nearly 4% on £2.77bn in 2007.

The UK’s other multichannel broadcasters saw advertising revenue rise slightly in 2008, by £2m to £810m. This represents the smallest growth rate among multichannel broadcasters (excluding PSB portfolio channels) since 2005.

Figure 2.15 Net advertising revenue, by sector

Growth 1 year 5yr CAGR

£3,242m £3,481m £3,615m £3,462m £3,576m £3,471m -2.9% 1.4% 100% Commercial £676m £695m £695m £772m £808m £810m 0.2% 3.7% multichannels 80% £99m £168m £270m £380m £457m £457m 20.3% n/a Commercial PSB portfolio channels

£m 60%

-7.7% -3.0% Commercial 40% £2566m £2686m £2686m £2427m analogue channels £2427m £2387m £2204m

20%

0% 2003 2004 2005 2006 2007 2008

Source: Ofcom/broadcasters. Note: Figures are nominal. Commercial PSB portfolio channels include ITV2, 3, 4, Men & Motors, CiTV, E4, More 4, Film 4, 4 Music, Five US and Fiver (plus their ‘+1’ channels). Sponsorship revenues are not included. Totals may not equal the sum of the components due to rounding.

Figure 2.16 shows that three of the commercial analogue channels (ITV1, GMTV1, Channel 4 and Five) experienced declining advertising revenue in 2008. ITV1 and Channel 4 saw the biggest falls, down 8.9% and 9.1% respectively, while Five’s fell 5.5%. GMTV1, by contrast, saw an increase of 1.8%. Their share of total television advertising fell by four percentage points to 63.3% in 2008. The multichannel sector’s share rose by 4.1 percentage points year on year to 36%, driven by gains at the PSB portfolio channels, which attracted a 13% share of the UK television advertising market in 2008, up from 11% in 2007.

Figure 2.16 TV advertising market share, 2008

Total NAR = £2,204m (£2,387m in 2007) 100% 1.6% 1.5% 7.8% 8.1% GMTV1 80% 17.9% 19.2% Five 60% 36.7% 32.6% Channel 4/S4C 40% Other 20% 36.0% 38.5% ITV1 0% 2008 2007

Source: Ofcom/broadcasters. Note: Channel 4 includes S4C

2.2.4 TV shopping accounts for nearly a third of non-broadcast revenue

Figure 2.17 gives a breakdown of total non-broadcast and other revenue generated by television channels, including PSBs and multichannel broadcasters. The operating margin on TV shopping accounted for a third of non-broadcast revenue in 2008 (£240m). The second largest component of non-broadcast revenue was sponsorship, which reached

84 £180m (22%). Other revenue accounted for £137m, while S4C’s grant from the DCMS accounted for a further £98m.

Figure 2.17 Breakdown of non-broadcast and other revenue, 2008

Total non-broadcast revenue = £816m Other revenue £137m

Programme sales TV shopping £24m £240m

Other funding (inc. S4C) £107m

Interactive services £70m Sponsorship £180m Pay-per-view £57m

Source: Ofcom/broadcasters. Note: TV shopping represents aggregate operating margin of products sold via television. Totals may not equal the sum of the components due to rounding.

2.2.5 Sports and Entertainment channels generate most multichannel revenue

Figure 2.18 details how much revenue television services in a selection of multichannel key genres generated in 2008. Sports accounted for nearly half (48%) of the total within the seven genres included in this analysis. Entertainment was the second largest single source of revenue, with £933m (33%). (This analysis excludes Multicultural, Adult, Interactive, Gaming and Shopping channels which offer comparatively little in the way of traditional programming).

Total revenue from the seven genres was £3,025m in 2008, up from £2,905m in 2007. However, these figures are not directly comparable, because a greater number of channels had made their submissions to Ofcom at the time of writing in 2008 than in 2007.

85 Figure 2.18 Multichannel broadcasters’ revenue in key channel genres, 2008

Total revenue = £3,025m across the seven genres included Leisure Music Factual £71m £98m £130m Children's £150m Entertainment News £993m £120m

Sport £1,462

Source: Ofcom/Broadcasters Note: The figures in this chart include all sources of revenue accruing to multichannels. This includes those set out in Figure 2.14 plus wholesale subscriber payments from platform operators.

2.2.6 TV industry output

Nearly 2.5 million hours of television broadcast in 2008

UK television channels broadcast 2,483,495 hours of programming in 2008. Of these, 1,448,574 hours were broadcast by the PSB channels and key multichannel genres (Entertainment, Sport, Film, Factual, Children’s, News, Leisure and Music). Of this total, 9% (132,618 hours) were first-run originations; by broadcaster and genre, although the proportion of first-run originated hours varied substantially.

Ninety-three per cent of the 12,902 hours broadcast by PSBs in the nations and regions last year were originations; of the 42,792 hours of network programming broadcast by the five main PSB channels, 49% were first-run originations. Originated hours among the BBC’s digital channels constituted 37% of their 35,583 total hours.

The key multichannel genres - Entertainment, Sport, Films, Factual, Children’s, News, Leisure and Music – accounted for 1,357,297 (94%) of total broadcast hours from mainstream channels in 2008. A large proportion of these hours were either acquired or repeats – these channels broadcast the lowest proportion of first-run originations (6%).

A further 1,126,198 hours were broadcast by multichannel services in other genres, such as Shopping, Multicultural, Adult, Interactive and Gaming. These genres are excluded from Figure 2.19 to ease comparability.

86 Figure 2.19 Total and first-run originated hours of output among PSBs and key multichannel genres, all day, 2008

Proportion of hours by operator (%)

Total hours = 1,448,574 First run = 132,618 100% Other digital 80% channels 86,002 60% Programmes for 1,357,297 Nations & Regions 40% BBC digital 12,032 channels 20% 13,451 12,902 21,133 35,583 Main five channels 0% 42,792 (network) Total hours of output Total hours of first-run originations Source: Ofcom/broadcasters Note: The first-run figures include in-house productions and external commissions, not first-run acquisitions. GMTV is included within the figures for the five main channels. ‘Other digital channels’ includes Entertainment, Sport, Films, Factual, Children’s, News, Leisure and Music genres.

2.2.7 UK broadcasters’ content spend passed £5bn for the first time in 2008

In 2008, broadcasters’ spend on television output passed the £5bn mark for the first time, fuelled mostly by increased investment in BBC One and Sport and Film channels. Figure 2.20 illustrates that total spend on programmes in 2008 reached just over £5.0bn, up 2% on 2007.

Investment in programming for Sports and Film channels (the majority of which is the cost of acquiring rights) increased by £43m year on year to £1.2bn.

Of the five main PSB channels, BBC One, ITV1 (including GMTV1), and Five increased investment on their schedules in 2008; BBC Two and Channel 4 spent less. The BBC also reduced spending on its portfolio of digital channels, by £3m or 1.3%, in 2008.

The BBC’s spend on television output of £1.5bn accounted for 29% of the total investment across all channels in 2008, broadly in line with the comparable figures for 2006 and 2007. Spend on the five main PSB channels increased by £59m year on year, to reach £2.8bn.

The commercial PSBs spent £220m on programming for their portfolio channels, up £1m from 2007. Spending on programmes for the rest of the commercial multichannels decreased again in 2008, down by 4% to £599m.

87 Figure 2.20 Spend on programmes

1 yr growth

£4,907m £4,972m £5,038m 2.7% 5,500

5,000 £205m £191m £191m 2.6% Five £184m £219m £220m 4,500 £225m £224m £221m £351m £378m £361m -0.5% Other PSB portfolio channels 4,000 £509m £510m £529m -1.3% BBC digital channels m3,500 £ £644m £623m £599m 3,000 -4.5% BBC Two

2,500 £856m £868m £840m -3.8% Channel 4 2,000 -3.9% Other digital channels £868m 1,500 £841m £802m 1.9% ITV1 + GMTV1 1,000 8.2% BBC One 500 £1093m £1166m £1199m

0 2.8% Film/Sport channels 2006 2007 2008

Source: Ofcom/broadcasters. Note: Figures expressed in nominal terms. Figures do not include spend on nations and regions output. BBC digital channels includes BBC Three, BBC Four, BBC News Channel, BBC Parliament, CBBC, CBeebies, and BBC HD. ‘Digital-only commercial channels’ include all genres (excluding sports and Films). Programme spend comprises in-house commissions, commissioned produced by independents, spend on acquired programmes, spend on rights and repeats.

2.2.8 Television output on the five main PSB channels

PSBs produced fewer hours of first-run original output in 2008

The five main PSB channels broadcast 33,165 hours of first-run originated programming in 2008, down by 3% on 2007 and by 5.6% (1845 hours) since 2003.

The principal driver of this reduction was a 7% fall in first-run originations in non-peak network hours, to 15,536 hours, perhaps reflecting broadcasters’ renewed focus on putting new hours of content into those parts of the schedule where audiences are largest. First-run originations in peak-time network hours (18:00 – 22:30) and regional hours increased by 54 hours and 80 hours respectively. Ofcom’s annual report on public service broadcasting, published in July 2009, provides further detail on this.20

20 http://www.ofcom.org.uk/tv/psb_review/annrep/psb09/psbrpt.pdf

88 Figure 2.21 Hours of first-run originated output on the five main PSB channels Spend on programmes

Growth 1 year 5yr CAGR Transmitted hours 35,022 33,649 32,921 33,473 34,141 33,165 -2.9% -1.1% 40,000

30,000 0.7% -1.5% Regional 13,006 13,425 11,952 12,169 11,919 12,032

20,000 -6.7% -1.0% Non-peak network

16,321 15,733 15,142 16,021 16,646 15,536 1.0% -0.3% Peak-time 10,000 network

5,695 5,491 5,610 5,533 5,543 5,597 0 2003 2004 2005 2006 2007 2008 Source: Ofcom/Broadcasters

While first-run hours fell out of peak time in 2008, spend in daytime rose by 3.6% in real terms. But as Figure 2.22 illustrates, overall, the five PSB channels invested less in first-run originations. In 2008 prices, they spent £2,620m in 2008, compared to £2,697m in 2007 – a 2.9% reduction.

The fall was particularly marked in regional programming, where spend on first-run originations dropped by 10.8% to £306m between 2007 and 2008. Spend on late-night and peak-time originations dropped by 3.7% to £247m and by 3.6% to £1,428m respectively. Peak time continued to attract the majority of spend, attracting 55% of investment, comparable to that seen in 2007.

Phase One of our second review of public service broadcasting, published in April 2008, found that the five main PSB channels and the BBC’s digital channels accounted for 90% (£2.5bn) of investment in networked UK originated output in 2007. The non-PSB channels accounted for 10% (£268m) when excluding Film and Sports channels as the majority of expenditure for these channels is on rights.21

21 http://www.ofcom.org.uk/consult/condocs/psb2_1/

89 Figure 2.22 Spend on first-run originated output on the five main networks

Growth 1 year 5yr CAGR

3,500 £3,101m £3,064m £2,952m £2,848m £2,697m £2,620m -2.9% -3.3%

3,000 £423m £410m £383m £350m Regional 2,500 £424m £406m £339m £306m -9.7% -6.3% £374m £310m £264m £247m 2,000 Late night m £710m £731m £687m £668m -6.4% -10.2% £ £616m £639m 1,500 d -3.7% -2.1% Day time

1,000 -3.4% -1.6% Peak time £1,545m £1,516m £1,508m £1,520m £1,479m £1,428m 500

0 2003 2004 2005 2006 2007 2008 Source: Ofcom/broadcasters. Note: Figures are expressed in 2008 prices. Figures include GMTV.

Despite falling investment and increased hours of first-run originations, the cost per hour (CPH) of original programming on the five main channels has not fallen for all parts of the schedule, since the trends for hours and spend have diverged. Figure 2.23 shows that the CPH for day-time and late-night output increased year on year between 2007 and 2008, up by £4k (6.5%) and by £3k (7.1%) respectively, to £66k and £42k.

CPH for regional programming fell slightly in 2008, by £3k (or 10.7%) to £25k per hour, while first-run original peak-time programming declined in CPH, down by £12k (4.7%) to £255k. On average, peak-time originations were ten times more expensive to produce than regional programming; the ratio in 2003 was about eight times.

Figure 2.23 Cost per hour of first-run originated content on the five main channels Cost per hour (£’000)

300

£271 £276 £269 £275 £267 £255 Peak-time 200 Day-time

100£83 £79 £73 Late night £68 £62 £66 Regional £63 £69 £68 £50 £39 £42 £31 0 £33 £31 £29 £28 £25 2003 2004 2005 2006 2007 2008

Source: Ofcom/Broadcasters. Note: Figures are expressed in 2008 prices. Figures include GMTV.

In 2008, the five main PSB channels and the BBC’s digital channels broadcast a weekly average of 176 hours of first-run originations in peak time (18:00 to 22:30), the highest

90 number since 2005. Across the entire day (24 hours), total weekly first-run originations were 661 hours in 2008, down from 673 hours in 2007.

Figure 2.24 shows that real CPH for first-run originated programmes on the PSB channels and on the BBC’s digital channels continued to fall in real terms in peak time and across the day in 2008.

Most of the five PSB channels reduced the number of first-run originated hours across their all-day schedules. The exception was BBC Two, where hours increased from 68 to 70. The most significant reductions were seen on ITV1 and GMTV1, where first-run originations dropped by 13.4% (or 16 hours per week) to 103 hours per week in 2008.

On the BBC’s digital channels – BBC Three, BBC Four, BBC News Channel, BBC Parliament, CBBC, CBeebies and BBC HD – hours of first-run originations rose by 3.9% (or 10 hours) year on year.

In peak time, hours on two of the five main PSB channels – ITV1 and Five – rose by 4% and 14% respectively. By contrast, hours in peak on BBC One, BBC Two and Channel 4 each fell by one hour a week between 2007 and 2008. The BBC’s digital channels increased their total peak-time original hours by 9% in 2008 to reach 70 hours per week.

Figure 2.24 First-run originated output by the PSBs, all day and peak time

All day real cost/hour (£k, 2008 prices) Peak cost/hour (£k, 2008 prices)

81.6 81.9 77.2 73.5 72.7 184.6 174.1 186.1 178.3 164.2 800 200

600 150

BBC digital k 72 70 BBC digital 274 261 247 257 65 62 64 269 channels channels Five Five

400 71 100 13 14 13 12 14 Channel 4 69 65 74 69 Channel 4 63 23 21 22 22 21 69 65 61 66 ITV1+GMTV1 ITV1+GMTV1 Hours per week per Hours Hours wee per 25 25 25 100 95 105 119 103 25 26 200 BBC Two 50 BBC Two 64 68 70 68 70 19 21 21 21 20 BBC One BBC One 104 103 99 105 101 25 26 25 26 25 0 0 2004 2005 2006 2007 2008 2004 2005 2006 2007 2008 Source: Ofcom/broadcasters. Note: Figures are expressed in 2008 prices.

PSB hours of output, by genre

Figure 2.25 sets out the composition of peak-time schedules of all hours, not just first-run originations, of the five main PSB channels by genre. Drama and General Factual, two of the largest components of peak-time schedules, experienced hours reductions during 2008, falling by 6% to 1,833 hours and by 0.2% to 2,365 hours respectively.

Hours of peak-time Drama fell by 119 hours in 2008 to 1,833 hours, down 6.5% year on year and down 13% since 2003. Peak-time News output in 2008 reached its highest level since 2004, with 827 hours broadcast. This was driven by the reinstatement of ITV1’s News at Ten flagship bulletin in January 2008 for four days per week, brought forward from 22:30. Peak-

91 time coverage of Current Affairs also increased year on year by nine hours to 312 hours in 2008.

Coverage of Sports in peak time increased in 2008, largely due to the summer’s European football championships (broadcast by the BBC and ITV) and the Beijing Olympics (BBC). There were 457 hours of Sport broadcast in peak time in 2008 on the five main PSB channels. This represented an increase of 20% on 2007 but was still 11% down on 2006, when the last football World Cup tournament was held, and in which England participated. None of the home nations’ football teams qualified for the 2008 European Championships.

The hours of films broadcast in peak time increased for the second consecutive year, reaching 630 hours in 2008, up by 2% on 2007 and 8% on 2006. Hours of light Entertainment/Modern Music, the third-largest category of content in peak-time schedules, rose slightly in 2008 (by five hours) to 1,282.

Figure 2.25 Genre mix on five main PSB channels in peak time, by hours

Proportion of total hours

8,178 7,933 7,936 7,929 7,923 7,978 100% 362 401 341 507 366 457

1,330 1,268 1,277 Sport 1,395 1,362 1,282 80% Light Entertainment & 688 618 937 757 579 630 Modern Music Films

60% 1,935 1,952 1,833 Drama 2,070 1,863 1,954 Education

40% General Factual 2,253 Religious 2,015 2,105 2,149 2,370 2,365 Children's 20% 284 296 318 318 303 312 Arts & Classical Music 917 835 785 788 792 827 Current Affairs 0% News 2003 2004 2005 2006 2007 2008 Source: Ofcom/broadcasters. Note: Figures do not include spend on nations and regions output.

Figure 2.26 illustrates the genre mix for the five main PSB channels in their daytime schedules (06:00 – 18:00). Hours dedicated to General Factual programming continued to increase in 2008, up by 6% on 2007 and an increase of 19% on 2006.

General Factual, which includes programmes around property and leisure, for example, is the largest single component of daytime schedules across the five channels, a trend that emerged in 2007. Children’s, the largest part of daytime schedules prior to 2007, fell by 5% to 4,074 hours. Light Entertainment/Modern Music increased its presence in daytime, up by 3% year on year.

92 Figure 2.26 Genre mix on five main PSB channels in daytime

Proportions of total hours 100% 1,832 1,958 1,837 1,753 1,687 1,796 Sport Light Entertainment & 2,665 2,810 2,713 2,491 2,370 2,435 80% Modern Music 1,811 1,716 1,593 Films 2,069 2,080 2,464 2,759 2,817 Drama 2,031 2,056 1,797 2,654 60% 694 738 821 816 810 733 Education 3,165 General Factual 3,150 3,512 3,744 4,368 4,637 40% Religious

5,055 4,906 Children's 4,575 4,333 4,275 4,074 20% Arts & Classical Music 830 379 384 460 451 459 Current Affairs 2,939 3,299 3,191 3,041 3,068 2,901 0% News 2003 2004 2005 2006 2007 2008 Source: Ofcom/broadcasters. Note: Includes five main channels plus GMTV1. Figures do not include spend on nations and regions output Genre mixes cover all hours and not only first-run originations.

The analysis of the BBC’s portfolio of digital channels reveals rising output in 2008, due to the inclusion of the BBC HD channel, which launched in December 2007 (Figure 2.27). The channel portfolio benefitted from an extra £38m investment in 2008 (in 2008 prices).

The largest single component of the portfolio by hours continued to be the News genre, largely due to BBC News Channel. In 2008, 47% (16,593 hours) of the BBC digital channels’ hours were dedicated to News programming, which is down from 55% (17,890 hours) in 2004.

Hours of Light Entertainment/Modern Music rose by 16% year on year to 2,082, while General Factual, which comprised 2,655 hours of the BBC’s digital channels’ output in 2008, was up 12% on 2007. In 2008, ‘Other’ genres, which include genres outside of the main six included, and miscellaneous programming, accounted for a growing number of hours in 2008, up by 30% to reach 2,841 hours. Drama, which is included in the ‘other’ section, saw its hours increase from 666 in 2007 to 1,357 hours in 2008.

93 Figure 2.27 The BBC’s digital channels genre mix, by hours (all-day)

Output (hrs) 31,421 32,792 32,839 32,986 33,353 35,583 Investment (£m) £245m £254m £282m £235m £224m £262m 100% Other 1,751 1,738 1,690 2,374 1,993 2,841 1,306 1,143 1,260 1,386 1,743 1,340 1,478 1,360 1,077 1,048 2,082 1,282 Light Entertainment & 1,615 2,297 2,482 2,503 2,335 80% 2,655 Modern Music Arts & Classical Music 7,983 8,021 8,033 7,957 8,326 60% 8,530 225 340 General Factual 1,211 1,168 1,336 40% 8,837 Children's

17,890 17,674 Current Affairs 16,661 16,740 16,593 20% 8,589 News

0% 2003 2004 2005 2006 2007 2008

Source: Ofcom/broadcasters. Note: BBC digital channels include BBC Three, BBC Four, BBC News Channel, BBC Parliament, CBBC, CBeebies and, from 2008 only, BBC HD. Investment figures are in 2008 prices. Other includes: Education, Drama, Film, Religion and Sport. The BBC allocated Parliamentary coverage to the Current Affairs genre in the data for 1998 to 2003. From 2004, it has been allocated to either News or Current Affairs.

2.2.9 Multichannel output, by genre

Entertainment and Music accounted for one in every two broadcast hours among key genre in 2008

Figure 2.28 gives a breakdown of broadcast hours in eight key multichannel genres, split by type of channel rather than genre. Entertainment and Music accounted for 50% of all total broadcast hours in 2008, at 354,149 hours and 253,402 hours respectively. Sports and Film channels represented just over a fifth (21%) of broadcast hours, with Factual, Children’s, News and Leisure accounting for a remaining one-third of hours (33%).

Total broadcast hours across the eight genres was 1,774,325 in 2008, 75% higher than the 1,012,297 reported in 2007. A number of factors have contributed to this:

 a greater number of channels have been included in the 2008 analysis;

 at the time of writing, a greater volume of returns had been received from channel operators; and

 Film channels, which broadcast 152,492 hours in 2008, have been added to the data for the first time.

94 Figure 2.28 Total multichannel hours and first-run originations/acquisitions, 2008

Proportion of hours by channel genre (%) Total = 1,774,325 Total = 171,971 (acquisitions = 95,969) (2007 = 1,357,297) (2007 = 111,783) 100% 152,492 19,717 Films 14,486 Music 80% 253,402 3,672 Leisure 74,360 51,815 97,794 60% News 140,025 Sport 40% 183,083 47,466 101,992 Factual 4,014 20% 14,439 354,149 Children's 26,362 0% Entertainment Total hours First-run hours and acquisitions Source: Ofcom/broadcasters Note: Number of total hours have increased year on year due to new channels and a greater number included in analysis. Broadcast hours exclude Sky Box Office and barker channels, which promote TV content. First-run hours include first-run in-house and commissioned content.

Focusing on first-run originations and acquisitions, Entertainment, News and Sports accounted for two-thirds of broadcast hours (69%) among the eight key genres in 2008. The majority of channel schedules for Sports and News are studio broadcasts or live coverage of events. Music constituted nearly a quarter of total hours, while just 8% (14,486 hours) were first-run originations and acquisitions, due to heavy reliance on often-repeated music videos.

Nearly nine in ten multichannel hours were repeats in 2008

Programme repeats account for the vast majority of multichannel hours across key genres, making up 87% (1,175,326 hours) of total output across the eight key genres in 2008 (Figure 2.29).

First-run commissioned programmes, made by external producers, accounted for 17,422 hours, or 1% of the broadcast hours in the Entertainment, Sport, Films, Factual, Children’s, News, Leisure and Music genres. First-run acquisitions accounted for 7% (76,403 hours) of the total across the key genres, ahead of in-house productions which accounted for 5% (68,429 hours).

95 Figure 2.29 Total multichannel hours by source across key genres, all-day, 2008

Total hours across key genre in 2008 = 1,357,297

First-run acquisition 7% First-run in-house 5% First-run commission 1%

Repeats 87%

Source: Ofcom/broadcasters. Note: Includes Entertainment, Sport, Films, Factual, Children’s, News, Leisure and Music

Figure 2.30 shows that commercial multichannel broadcasters invested nearly £2bn in programming during 2008. Sports accounted for 50% of the total, most of which was spent on broadcast rights. A total of £468m was spent on Entertainment channels; Film channels accounted for £230m while News channels spent £139m.

Figure 2.30 Content spend by commercial multichannels in key genres, 2008

£m £1,955m

2,100 £24m £34m 1,950 £44m 1,800 £47m 1,650 £139m Music 1,500 £230m Leisure 1,350 Children's 1,200 £468m 1,050 Factual 900 News 750 Films 600 Entertainment 450 £969m 300 Sport 150 0 2008 Source: Ofcom/Broadcasters. Note: Excludes BBC digital channels and PPV channels

2.2.10 The TV production sector

PSB spend on independently-produced commissions maintained in 2008, but in- house spend down

Combined spend by the BBC, ITV1, Channel 4 and Five on first-run commissions has declined by 8% over the last two years – down from £2.64bn in 2006 to £2.44bn in 2008. This trend was also apparent in the commissioning spend of individual channels – all fell in real terms in 2008 compared with 2006 – the largest reductions being on ITV1 (10%) and Five (18%).However, comparing the data from 2007, there were small increases on ITV and Five. Within the combined total, spend on in-house productions fell by 15% in the two years to 2008, but independent commissions proved more resilient, rising by 2% to £1.19bn in 2008. Figure 2.31 shows that all channels, apart from Channel 4 and Five, reported increased spend on independent commissions over the period, although it should be noted that Channel 4 and Five do not produce programmes themselves; all their commissions are externally sourced.

Figure 2.31 Spend on first-run commissions by PSBs

Investment (£m) 800 External commissions

£178m Internal commissions £296m £194m 600 £226m £323m £302m

400 £113m £606m £106m £558m £110m £526m £99m £64m £532m

200 £82m £434m £417m £410m £391m £389m £238m £229m £198m £96m £91m £116m £71m £107m 0 £69m 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 BBC1 BBC2 ITV1 Channel 4 Five BBC multichannel Source: Ofcom/broadcasters. Note: First-run network commissions including News and Sports rights. BBC multichannels included in the chart: BBC Three, BBC Four, CBBC, CBeebies

Pact financial census 2009 Established in 1991, Pact (Producers’ Alliance for Cinema and Television) is the UK trade association that represents the commercial interests of companies in independent television, feature film, children's and animation, and new media production companies.

Pact has carried out a financial census of the UK television production sector since 2005, and published the fourth edition of the census in 2009. Its purpose is to estimate the size and performance of the independent production sector, using a representative sample of companies. The 2009 census was carried out between March and April 2009, covering data for the 2008 financial year, typically ending in December 2008. It surveyed Pact members, including subsidiaries of group companies, and received responses from 76 companies, representing 65% of total industry turnover. The figures given in this section are estimates, based on the companies surveyed and adjusted accordingly, to provide approximations for the total market.

97 Independent production sector revenue growth slows

Data from the Pact census indicate that the independent production sector continued to grow, but at a much slower rate in 2008, to just 1% year on year. Pact estimated the size of the sector at £2.16bn, with TV income contributing the lion’s share of £1.9bn (88%), but growing more slowly (0.5%) than income from non-TV activities, such as corporate videos and new media revenues, which totalled £256m (Figure 2.32). Within this figure, new media revenues rose by 72% during 2008, ending the year with a total of £66m. Note that these figures are based on estimates by Pact from their census data, and are not comparable with data presented elsewhere in this report, which have been separately sourced on a different basis from broadcasters’ audited accounts.

Figure 2.32 TV production sector revenue, by TV and non-TV activities

£m 2,500 £1,597m £1,952m £2,136m £2,160m

2,000 £242m £256m £199m

1,500 £105m Non-TV activities

1,000 £1,894m £1,904m £1,753m Television £1,492m 500

0 2004 2006 2007 2008 Source: Oliver & Ohlbaum analysis, Pact census

The sale of primary TV rights continues to be the main source of revenue for the independent sector. Growth in UK primary commissions slowed to 1.1% in nominal terms to a total of £1.4bn in 2008, with secondary and additional rights rising to £179m (Figure 2.33).

98 Figure 2.33 Independent producers’ sources of UK television revenue

£m £1,362m 1,400 £1347m

£1191m 2005 Census £1147m 1,200 2007 Census 2007/08 Census 1,000 2009 Census 800

600

400 £179m 200 £135m£146m £103m £16m £32m£43m£34m £46m £16m£21m£34m 0 Pre-Production Primary TV Rights Secondary TV and Other TV Additional Rights

Source: Oliver & Ohlbaum analysis, Pact Census

The 2009 Pact census provides information on the distribution of independents across the UK, based on the location of their offices. Two-thirds (67%) were based in London, with the remainder from the nations and English regions. Figure 2.34 shows the companies’ geographic locations.

Figure 2.34 Location of independents’ bases

Northern Ireland, Midlands, 3% 1% Wales, 4% North, 6%

Scotland, 5%

Outside M25 33% London South & West, 14% (Inside M25) 67%

Source: Oliver & Ohlbaum analysis, Pact Census

Independent commissions from public service broadcasters

Commissions from public service broadcasters underpin the independent sector. In terms of hours broadcast in 2008, PSBs were more likely to commission in the Factual, Entertainment and Sports genres. Factual programmes accounted for 23% of all PSB-commissioned, independently-produced hours, with 21% in Entertainment and 18% in Sports. Factual

99 Entertainment accounted for 8%, while Hobbies and Lifestyle, Drama and Children’s each accounted for 6% of the total independent hours shown by the PSB channels (Figure 2.35).

Figure 2.35 PSB independent commissions, by genre, 2008 Proportion of Independent hours

12% Entertainment 21% Drama

Factual

18% 6% Factual Entertainment Hobbies/Lifestyle

Children's 6% 23% Sport 6% 8% Other

Source: Ofcom/broadcasters

Drilling down to commissioning patterns by individual broadcasters, Figure 2.36 shows the BBC’s commissioning from independents tends to be more evenly spread across a wider range of programme genres, compared with other broadcasters, partly because of its commissioning strategy and the way that the Window of Creative Competition (WOCC) operates. This programme guarantees independent producers a minimum of 25% of all commissions; in-house commissions are set at 50%; and the remaining 25% is available to in-house or independent productions, or other broadcasters. In 2008 Factual represented 20% of the BBC’s independent programmes, with Sport at 17% and Entertainment at 16%.

The ITV network channel commissioned far fewer Entertainment programmes in 2008 – 32% of all hours - compared with 55% in 2007 and 56% in 2006. Compensating for this, the proportions of Factual commissions doubled in 12 months to 38% of all hours in 2008. This was mainly due to changes in programme policy in the night-time schedule, with the demise of dial-in quiz shows.

Entertainment played a growing role in Channel 4’s independent commissioning strategy during 2008, and emerged as the largest commissioned genre by hours, accounting for 31% of total independent hours in 2008. Factual programmes accounted for 17% and Factual Entertainment 16%, while Drama reduced from 8% of Channel 4’s annual output to 6% in 2008. Five continued to commission more Sports than other genres, accounting for 36% of total external commissions, albeit a lower percentage than in the previous two years (48% and 45%).

100 Figure 2.36 PSBs’ external commissioning patterns, 2006 to 2008

Proportion of independent hours 100% 6% 6% 1% 6% 5% 6% 6% 6% 6% 7% 7% 4% 7% 4% 3% Other 18% 17% 4% 8% 20% 16% 20% 5% 5% 19% 80% 1% 1% Sport 4% 9% 36% 12% 9% 18% 19% 7% 48% 45% 18% Children's 12% 38% 16% 60% 9% 6% 7% 23% 21% 4% Hobbies/Lifestyle 11% 2% 15% 15% 3% 3% 17% 3% Factual Entertainment 40% 11% 15% 14% 12% 16% 25% 6% 20% 19% 20% 7% Factual 56% 55% 8% 19% 20% 6% 5% Drama 32% 31% 5% 25% 27% 23% 28% 23% 15% 16% 10% Entertainment 0% 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 BBC ITV1 Channel 4 Five Source: Ofcom/broadcasters

Figure 2.37 illustrates the proportion of network programmes commissioned from independents, split by day part for each of the PSBs in 2008. For BBC One, BBC Two and ITV1, the proportion of hours commissioned in the main part of the day (from 6am to 12.30am) was well above 25%. In the daytime schedule (from 06:00 to18:00), BBC One commissioned 37% from independents and on BBC Two the figure was 48%, with ITV1 commissioning 34%. The peak-time (18:00 to 22:30) figure was also high for BBC Two, at 40%; BBC One delivered 26% and ITV1 30%. In the two hours immediately after peak time (22:30 – 00:30) the proportions were 36% for BBC One, 25% for BBC Two and 27% for ITV1. During the night-time hours (00:30 – 06:00) BBC Two and ITV1 commissioned a high proportion, at 63% and 73% respectively, whereas BBC One commissioned a much lower amount in percentage terms (4%). Channel 4 and Five, as already stated, commission most of their originated output from independent producers, and this varies little across different times of the day.

Figure 2.37 Independent network productions, by day part, 2008

Percentage of qualifying programmes by broadcaster by volume

BBC One BBC Two ITV1 Channel 4 Five

100%

75%

% % % 50% 7 % % % 9 0 % 9 % 0 5 1 9 0 3 7 9 9 9 % 1 8 8 3 % 7 % 3 25% 8 % 6 % 4 % 0 % % 7 4 % 4 0 6 % % 3 3 6 3 3 5 7 % 2 2 2 4 0% Day-time (06:00-18:00) Peak-time (18:00-22:30) Post-peak (22:30-00:30) Night time (00:30-06:00) Source: Ofcom/broadcasters

101 2.2.11 Compliance with regulatory quotas

Compliance with programme quotas Television companies in the UK must comply with a range of obligations in the form of programme quotas which set minimum levels of types of programmes that they must broadcast. These obligations are laid down in the Communications Act 2003 and Ofcom has a duty under the Act to monitor and enforce compliance with these quotas, some of which apply to all broadcasters while others are specific to the PSBs. Ofcom has a direct relationship with ITV1, GMTV1, Channel 4 and Five in terms of licensing and regulation, while the BBC is regulated jointly by the BBC Trust and Ofcom. The Trust sets the majority of the BBC’s targets and monitors compliance but must consult with Ofcom before changing specific quotas, and must obtain Ofcom’s agreement in setting quotas for original productions and out-of-London network productions.

European programming quotas All television broadcasters licensed by Ofcom in the UK, including multichannel operators, are subject to the obligations of the Audiovisual Media Services (AVMS) Directive22. This requires that on each channel, a majority of programmes must be European (including the UK) and at least 10% must be made by independents, of which at least 50% must have been made within the past five years. The European Commission publishes a report on compliance by all EU Member States every two years and the next report, covering 2007 and 2008, is due for publication towards the end of 2009.

TV access services Quotas setting minimum levels for subtitling, signing and audio description applied to a total of 84 channels in 2008. All PSBs are subject to access service quotas, as are other broadcasters which achieve an average audience share throughout the year of 0.05% or more. Obligations apply only to those channels that then pass an affordability threshold based on their revenue. There is also an exception for those channels that face technical difficulties which cannot be overcome, such as music and news programmes, where there is insufficient space within the dialogue or sound-track to provide audio-description.

PSB quotas and the Communications Act 2003 The Act describes a range of programme obligations applying to public service channels, and Ofcom is responsible for setting appropriate quotas to meet these obligations. Quotas are fixed by Ofcom, taking into account each channel’s specific remit and other relevant criteria. They are reviewed when necessary, and the levels may be revised up or down to take account of changes in circumstances and the broadcasting environment. The quotas summarised below apply to all PSB channels - the BBC’s terrestrial and digital channels, ITV1, Channel 4, Five and S4C in Wales. They do not apply to multichannel operators or to the commercial broadcasters’ digital services:

1. Original productions – programmes commissioned by broadcasters from in-house production resources or independent producers.

2. Out-of-London productions – network programmes made in the UK outside the M25.

3. Independent productions – programmes made by companies which are independent of broadcasters.

22 The AVMS Directive replaced the Television Without Frontiers (TVWF) Directive on 10 December 2007 and must be transposed into UK legislation by December 2009.

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4. National and international News.

5. Current affairs.

6. Nations and regions programmes on ITV1/STV/UTV and the BBC – made and shown in the nations and English regions.

2.2.12 Original productions

These quotas were comfortably met in 2008

Original productions are one of the key elements of public service broadcasting in the UK – they are programmes that are made in the UK and commissioned from independent producers, or a broadcaster’s own in-house production facilities. Quotas are intended to maximise television production in the UK for the benefit of the broadcasting industry, by maintaining investment in content, as well as contributing to the viewers’ experience. As shown in Figure 2.38, quotas are set at different levels, depending on the broadcaster, and apply to the full broadcasting day (usually 24 hours, except in the case of the BBC’s digital channels). They apply separately to peak viewing times (18:00 to 22:30, except for BBC Three and Four, where peak time runs from 19:00 to midnight).

In 2008 all channels exceeded their quotas – generally by wide margins. The majority of programmes broadcast by PSB channels are original productions (the definition includes repeats). In peak time the proportions achieved were generally higher than all day, at well over 90% of programmes shown by BBC One, BBC Two, ITV1 and S4C.

Figure 2.38 Broadcasters’ performance against original production quotas

% Hours Quota Achieved 2007 Achieved 2008 100%

80%

60% 95% 100% 98% 99% 97% 99% 98% 98% 97% 100% 97% 95% 95% 96% 90% 90% 90% 90% 90% 81% 78% 85% 85% 83% 86%

40% 81% 80% 80% 80% 80% 79% 76% 87% 79% 75% 75% 82% 70% 62% 84% 76% 70% 70% 70% 70% 70% 70% 86% 65% 64% 81% 63% 59% 60% 56% 53% 49% 50% 42% 20% 42%

0% Five Five S4C S4C ITV1 ITV1 CBBC BBCTwo BBCTwo BBCOne BBCOne CBeebies BBCFour BBCFour Channel4 Channel4 BBCThree BBCThree BBC News 24 News BBC All day BBCParliament Peak time

Source: Ofcom/broadcasters Note: BBC figures include programmes made or commissioned for other BBC channels. BBC Three and Four peak-time hours run from 19:00 to midnight.

103 2.2.13 Nations’ and regions’ production outside London

There were increases in the proportion of output, by value, made outside the M25

The four main PSBs must each broadcast minimum amounts of programmes that have been produced outside the M25. These out-of-London production quotas have two elements – one relating to the value, which applies to the amount of money spent on programmes produced in the nations and regions, and the second relating to the volume of hours broadcast. To qualify against the quota, programmes must comply with two of Ofcom’s three Regional Production Definition criteria:

 having a substantive business and production base in the relevant nation or region;

 achieving a minimum level of expenditure in the nation or region; or

 achieving a minimum spend on production talent based in the nation or region.

The quota levels are different for each broadcaster, as shown in Figure 2.39, which illustrates levels achieved by value and volume since 2006. The quotas for the BBC are set at 30% by value and 25% by volume and apply to all its PSB channels. The BBC exceeded these quotas in each of the past three years, achieving 34.9% by value and 33.5% by volume in 2008. Looking ahead, the BBC has undertaken to increase the production and commissioning of programmes from Scotland, Wales, Northern Ireland and the English regions and has introduced a new commitment to produce 50% of output from outside London. Within this, 17% must come collectively from the devolved nations. The BBC is working towards full delivery of this requirement by 2016. In its Digital Britain report, the Government noted the BBC’s proposals to relocate a number of long-running programme strands to Scotland, and encouraged the BBC to improve on its targets for production in Scotland, while adopting a similar approach for Wales and Northern Ireland. The report also recognised the increasing pressure on the commercial PSBs’ production in the nations.

ITV regional licences currently have a higher quota level than the other PSB channels, at 50% for both value and volume, and each of the licensees (ITV Broadcasting Limited, STV, UTV and Channel Television) have met their volume quota in each of the last three years. In 2008 the licensees narrowly missed the value target, achieving 49.9%, having also failed to reach the required levels in 2006 and 2007 by much wider margins (delivering 46% and 44% respectively). Ofcom imposed sanctions in respect of the 2006 and 2007 breaches and is in discussion with ITV Network about the shortfall in 2008.

Before 2005, the quotas were set at 40% of expenditure and 33% of volume; they were increased to 50% for both volume and spend in line with the conclusions reached in Ofcom’s first PSB Review 23 of 2004/05. However, reflecting the need to align PSB requirements on the regional ITV licensees with the diminishing value of holding the licences, the second PSB Review24 decided that the quotas for the networked channel would be reduced to 35%, on a par with the 2004 levels, with effect from 2009 onwards.

Ofcom’s second PSB Review3 also increased the spend and volume quotas for Channel 4 from 30% to 35%, with effect from 2010. As Figure 2.39 shows, Channel 4 has consistently exceeded its quota levels and these increased quotas effectively ‘lock-in’ the current delivery. In 2008 Channel 4 achieved 31.7% of its output by value and 40.7% by volume against a quota of 30%.

23 Ofcom’s Review of Public Service Television Broadcasting (2004) http://www.ofcom.org.uk/consult/condocs/psb/ 24 Ofcom’s Second Public Service Broadcasting Review (2009)

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Alongside the 2010 quota revision came the introduction of a new minimum devolved nations quota of 3% of programmes that must be produced outside England. This is a more stretching requirement than Channel 4’s own suggestion, that would have taken effect from 2012, and Ofcom has suggested that, subject to funding, this figure should grow substantially in future years. It will consider whether to revise the figure upwards in the future.

Five has a much lower quota commitment, at just 10%, but has exceeded its obligations by large margins over recent years, reaching 34.5% by value and 17.4% by volume in 2008, albeit based on much lower total origination expenditure and volume of hours than the other broadcasters. The out-of-London quota does not apply to S4C.

Figure 2.39 Performance against the out-of-London production quotas

Percentage of network production produced outside London, by value and by volume 60%

50% Quota

40% Achieved 2006 30% 53.1 50.3 50.3 50% 50% 49.9 45.6

44.3 Achieved 2007 20% 42.7 40.7 39.9 37.2 35.3 34.9 34.5 33.5 33.1 32.6 32.4 31.9 31.7 30.1 30% 30% 30% 25%

10% 22.4 21.3 Achieved 2008 17.4 15.4 10% 10% 0% All BBC ITV1 Channel 4 Five All BBC ITV1 Channel 4 Five Value Volume

Source: Ofcom/broadcasters

Figure 2.40 shows the breakdown of spend on networked originated programme productions by nation and English region. Of the total UK spend of £1,915m, the majority of programmes were made in London, but this proportion has reduced a little from 63.3% in 2006 to 61.1% in 2008. The total spend in the nations and regions reached £744m in 2008, and a greater proportion of the total UK spend was produced out of the Midlands and East and the South of England than in 2006. The figure for the Midlands and East rose from 5.9% to 6.7%, while in the South spend increased from 8.9% to 10.2%.

Scotland’s proportional share of programme expenditure by the PSBs reduced from 2.6% in 2006 and 2007 to 2.5% in 2008, and the level of spend on first-run original productions in Scotland also fell from just under £50m a year in 2006 and 2007 to £48.5m in 2008.

The share of total PSB expenditure in Wales increased from 1.3% in 2007 to 1.7% in 2008, having fallen between 2006 and 2007. The value of commissions from Wales rose to £33m in 2008 from £25m the previous year, compared with £29m in 2006.

The value of programmes produced in Northern Ireland increased by £2m in the last two years, from £4m in 2006 to £6m in 2008. As a proportion of total programme budgets this represented a small increase; from 0.2% to 0.3%.

Expenditure on programmes made in Scotland, Wales and Northern Ireland is expected to grow in future years as the BBC’s commitment to producing more programmes in the

105 devolved nations starts to take effect and as Channel 4’s new 3% quota for the nations is implemented.

Figure 2.40 Expenditure on out-of-London production Percentage of production by value London Midlands & East Northern England Southern England Scotland Wales Northern Ireland

% % % 2006 63.3% 5.9% 17.6% 8.9% .6 .5 .2 2 1 0

% 2007 63.3% 5.7% 17.3% 9.6% % % .3 .6 .3 0 2 1

% % % 3 2008 61.1% 6.7% 17.4% 10.2% .5 .7 . 2 1 0

0% 20% 40% 60% 80% 100%

Source:Ofcom/broadcasters

Of the total of 16,100 hours of first-run UK-originated network programmes broadcast by the four main PSBs in 2008, 5,700 hours were made in the nations and English regions, equating to 35.4% of the total, up from 34% in 2006. In the Midlands and East, the proportion fell in 2007, from 4.8% of total hours in 2006, to 4.4%, and increased to 8.9% in 2008 with reductions in the Northern and Southern macro-regions (Figure 2.41).

The number of network hours produced in Scotland, and its share of total volume, improved marginally from 1.6% to 1.8% between 2006 and 2008; in Wales the proportion increased to 0.9% from 0.7% the previous year, returning to the level delivered in 2006. Northern Ireland’s share fell to 0.1% in 2008 from 0.2% in the previous two years.

Figure 2.41 Volume of out-of-London production Percentage of production by volume London Midlands & East Northern England Southern England Scotland Wales Northern Ireland

%% % 2006 66.0% 4.8% 14.5% 12.0% .6 .9 .2 1 0 0

% 64.3% 4.4% 17.9% 10.8% % % 2 2007 .7 .7 . 1 0 0

% 2008 64.6% 8.9% 12.7% 11.0% % % 1 .8 .9 . 1 0 0

0% 20% 40% 60% 80% 100%

Source: Ofcom/broadcasters

Figure 2.42 shows that all the broadcasters, with the exception of Channel 4, raised the proportion of their expenditure on UK original productions made in the nations and regions between 2007 and 2008. The BBC’s out-of-London spend rose from 32.4% in 2006 to 34.9% in 2008, while on ITV1/STV/UTV the increase was from 45.6% to 49.9% over the same period. The rise at Five was more significant, albeit from a lower base, growing from 21.3% to 34.5%. The proportion of Channel 4’s spend on programmes produced outside London

106 fell from 37.2% in 2006 to 31.7%, partly because the overall programme budget increased. This was also driven by the fact that there were fewer commissions from independents based in Southern England in 2008, mainly in Hobbies and Leisure programming.

The proportion of spend by the BBC on productions in the English regions outside the M25 increased marginally, from 25% of all originated expenditure in 2006 to 27% in 2008. Most of the increase came in the South of England, which attracted 14.2% of all spend in 2008, up from 10.5% in 2007. ITV1/STV/UTV’s spend in England rose from 44% in 2006 to 48%, with the Midlands and East macro-region accounting for the largest rise (from 8.4% to 13.4%). The proportion of spend devoted by Channel 4 to productions in England reduced from 35% to 30%, driven mainly by falls in the South (as outlined above), while Five’s rose from 21% to 31% in the past three years, across all three macro-regions.

In Scotland, the BBC’s spend on original productions as a proportion of total expenditure rose from 3.5% in 2006 to 3.7% in 2008; the value of spend in Scotland also increased. On ITV1/STV/UTV, while the proportion of expenditure increased in 2007 to 1.9% (from 1.7% in 2006), it fell back to 1.4% in 2008, and on Channel 4 the equivalent figure fell from 2.6% in 2006 to 1.7% in 2007 and 1.4% in 2008. On Five there has been a gradual increase, both in the proportion of spend on programme production in Scotland and on the value of that spend over the past three years.

In Wales, most PSB broadcasters raised their share of programme spend as a proportion of total budgets between 2006 and 2008, albeit by small margins. The BBC’s spend in Wales reached 3.5% of the total in 2008, compared with 3.2% in 2006. In 2008 ITV1 delivered a share of 0.1% (having funded no programme production at all in Wales during 2006 and 2007), while Channel 4 spent 0.01% of its commissioning funds in Wales, and Five allocated 0.5% of its budget.

The proportions of programme spend in Northern Ireland remained relatively low but increased a little, year on year, on the BBC’s channels, rising from 0.3% of total expenditure in 2006 to 0.6% in 2008.

Figure 2.42 Original networked production expenditure, by broadcaster Percentage of production by value

0.3% 0.4% 0.6% 0.2%0.1% 0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 3.5% 3.2% 2.6% 0.0% 0.0% 0.1% 0.1%0.2% 0.0% 0.0% 0.5% 0.5% 3.5% 3.3% 3.7% 1.7% 1.9% 1.4% 2.6% 1.7% 1.4% 0.5% 2.3% 2.9% 100% 5.3% Northern 4.6% 3.7% 4.0% 10.8% 2.7% Ireland 12.7% 12.8% 12.1% 8.7% 10.5% 12.0% 5.1% 14.2% 12.8% 3.0% Wales 80% 29.4% 31.0% 18.4% 9.7% 10.2% 30.8% 18.5% 9.1% 19.9% 15.4% 17.4% 5.2% 4.1% 3.7% 1.0% 2.0% 2.1% Scotland 60% 9.2% 8.4% 13.4% Southern England 40% 78.7% 67.6% 67.4% 68.3% 65.1% 62.8% 64.7% 66.9% 65.5% Northern 55.7% 54.4% 50.1% England 20% Midlands & East

0% London 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 BBC ITV1 Channel 4 Five

Source: Ofcom/broadcasters

107 The volume of out-of-London production by broadcaster over the last three years is shown in Figure 2.43.

On the BBC’s PSB channels, the proportion of hours made in the Midlands and East macro- region has remained steady (5.6% - 5.9% of the total), while the level fell by four percentage points in Northern England, from 9.7% to 5.7%. In the South of England there was an increase of seven percentage points, from 10% in 2006 to 17% in 2008. In Scotland the proportion showed a small increase, while in Wales and Northern Ireland it was unchanged (at 1.5% and 0.3% respectively).

There were significant changes on ITV1/STV/UTV, with an increase of 17 percentage points in the Midlands and East, from 4.2% to 21%, and decreases in Northern and Southern England, which were mainly because of changes in programme production and output for the night-time schedule. The percentage of hours of production in Scotland and Northern Ireland were lower in 2008 than in 2006, but higher in Wales in 2008.

There were no changes of particular note in Channel 4’s production volumes in the English regions, while on Five there were small increases in the Midlands and East, with reductions in the North and South of England. The proportion of hours made in Scotland fell on Channel 4 from 1.5% in 2007 to 1.4%, returning to the 2006 level. In Wales the proportion fell from 1.5% to 0.8% in 2007, rising to 1.3% in 2008. On Five the proportion increased a little in Scotland (to 0.6%) staying the same as the 2007 level in Wales. It should be noted that as the number of hours produced in the devolved nations is low, changes in the proportions broadcast year on year are not statistically significant.

Figure 2.43 Breakdown of production volume, by broadcaster Percentage of production by volume

0.3% 0.3% 0.3% 0.2% 0.1%0.0% 0.0% 0.1% 0.0% 0.0% 0.0% 0.0% 1.5%1.5% 1.5% 0.0% 0.0% 0.2% 1.5% 0.8% 1.3% 0.0% 0.2% 0.2% 2.9% 3.2% 3.4% 0.6% 0.4% 0.3%1.4% 1.5% 1.4% 0.2% 0.2% 0.6% 100% 3.1% Northern 6.0% 4.3% 8.7% 4.6% 3.3% 4.9% Ireland 10.0% 19.3% 13.3% 14.6% 14.6% 16.3% 7.1% 17.0% 7.3% 8.7% 24.3% Wales 80% 9.7% 6.2% 6.6% 5.7% 5.9% 43.7% 22.0% 22.2% 5.8% 5.6% 23.5% 26.0% Scotland 60% 21.0% 1.6% 1.2% 0.5% 4.2% Southern 2.9% England 84.6% 40% 82.6% 77.6% Northern 69.9% 68.1% 66.5% 60.1% 57.3% 59.3% England 49.7% 46.9% 49.7% 20% Midlands & East

London 0% 2006 2007 2008 2006 2007 2008 2006 2007 2008 2006 2007 2008 BBC ITV1 Channel 4 Five

Source: Ofcom/broadcasters

2.2.14 Independent productions

Twenty-five per cent quota exceeded by wide margins

The quota is fixed at 25% for all PSBs, and its purpose is to ensure that production companies that are independent of broadcasters have access to mainstream channels,

108

encouraging programmes from a variety of sources to be produced and shown. The Government’s Digital Britain acknowledged that the framework of the quota was working well. In a major change to the criteria determining which producers can qualify as part of the quota, Digital Britain recommended that STV and UTV should be allowed independent status when producing for PSB networks. This would support the objective in the production sector by encouraging greater access to network commissions by external producers.

Figure 2.44 shows that the quota has been easily exceeded by all broadcasters over the past five years, and 2008 was no exception. The level for the BBC’s PSB channels, taken together, has risen steadily from 31% in 2004 to 39% in 2007, with a small reduction to 38% in 2008. BBC One achieved 31% in 2008, while BBC Two rose to its highest level (45%). ITV1 (excluding GMTV) reached 40%, up from 35% in 2007. Channel 4, S4C in Wales and Five source most of their originated programming from independents, as they were not set up to produce programmes themselves. Consequently, the levels of independent output on these channels have always been extremely high and in 2008 Channel 4 reached 87%; Five 97% and S4C 89%.

Figure 2.44 Qualifying hours commissioned from independent producers 100%

80%

2004 60% 2005 2006 97% 96% 94% 91% 89% 88% 87% 87% 87% 84% 40% 84% 2007 83% 83% 82% 2008

59% Quota =

20% 45% 43% 42% 40% 40% 25% 39% 39% 39% 38% 35% 35% 33% 33% 33% 31% 31% 30% 30% 28% 27%

0% All BBC BBC One BBC Two ITV1 Channel 4 Five S4C

Source: Ofcom/broadcasters

A further requirement placed on broadcasters relates to the diversity of programmes which must be commissioned from independents. The intention is to ensure that independent producers are active across the full range of budget levels, including prestigious high-budget drama, as well as more mainstream output. While there is no requirement that the 25% quota must be achieved in each programme genre, in most cases it does exceed this level. Figure 2.45 shows how each broadcaster performed in 2008.

109

Figure 2.45 Qualifying independent commissions, by genre, 2008

% of qualifying hours Ent Comedy Drama Sport C.Affairs Factual Factual Ent Hob/Leisure Arts Music Religion Children's 100%

80%

60% 98% 98% 100% 100% 100% 100% 100% 100% 100% 100% 97% 96% 95% 93% 91% 91%

40% 83% 80% 79% 76% 74% 73% 60% 22% 54% 54% 53% 26% 50% 49% 45% 44%

20% 43% 42% 40% 38% 37% 34% 30% 30% 29% 26% 20% 5% 7% 0% All BBC ITV1 Channel 4 Five

Source: Ofcom/broadcasters

Figure 2.46 shows the levels achieved in peak time over the past five years – illustrating the growth on all channels. Although there is no separate quota for peak time, it is interesting to note that the proportions were all well above 25% in 2008, perhaps reflecting the maturity of the independent sector and the recognition of its value in terms of viewer levels and appeal in the peak-time schedule.

Figure 2.46 Peak-time qualifying hours commissioned from independents

Proportion of peak-time hours 100% 90% 80% 70% 2004 60% 2005 50% 2006 92% 91% 90% 87% 87%

40% 84% 81% 74% 30% 73% 73% 2007 20% 2008 42% 40% 36% 32% 31% 31% 30% 26% 25% 10% 24% 24% 21% 20% 18% 18% 0% BBC One BBC Two ITV1 Channel 4 Five

Source: Ofcom/broadcasters. Note: excludes regional programmes

110

2.2.15 News and Current Affairs

All channels meet quotas

Quotas for News and Current Affairs apply across all PSBs and help to maintain plurality, which the Government recognised in Digital Britain to be of benefit to UK viewers and for citizens, adding that plurality in some genres, particularly News, cannot be provided by the market. The following charts show that these quotas have been met consistently over the past five years. BBC One has the highest targets for News, and broadcast a total of 1,560 hours of News programmes in 2008 (Figure 2.47). These figures include the BBC Breakfast service, but exclude the night-time simulcasts from the BBC News Channel. ITV1’s news output totalled 374 hours (excluding GMTV), compared with its quota of 365 hours, while Channel 4 achieved 313 hours; Five 417 hours and S4C 238 hours.

Figure 2.47 Performance against national and international News quotas, all day

Quota Achieved 2004 Achieved 2005 Achieved 2006 Achieved 2007 Achieved 2008

1,500

1,000 1,560 1,620 1,572 1,508 1,467 1,380 500 619 417 374 478 465 459 451 444 408 388 385 365 313 319 315 312 311 230 232 248 200 238 200 0 208 BBC One ITV1 Channel 4 Five S4C

Source: Ofcom/broadcasters

Separate quota levels are set for peak time and all broadcasters exceeded the minimum levels required, as shown in Figure 2.48.

Figure 2.48 Performance against national and international News quotas, peak time

Quota Achieved 2004 Achieved 2005 Achieved 2006 Achieved 2008 Achieved 2008

300

200 293 281 280 278 276 275 217 213 210 210 209 100 208 208 184 180 178 171 169 150 150 Hours per year per Hours 141 137 135 129 128 126 125 119 115 100

0 BBC One ITV1 Channel 4 Five S4C

Source: Ofcom/broadcasters

111

Current Affairs quotas apply across the whole day and in peak time, and all broadcasters exceeded their commitments in 2008, as they did in the previous four years, as illustrated in Figure 2.49 and Figure 2.50.

Figure 2.49 Performance against Current Affairs quotas, all day

Quota Achieved 2004 Achieved 2005 Achieved 2006 Achieved 2007 Achieved 2008

600

500

400

300 463 456 528 434 200 433 365 Hours per year per Hours 336 335 396 248 214 240 238 219 215

100 212 208 130 93 90 83 60 78 71 85 87 77 81 81 80 0 BBC One & Two ITV1 Channel 4 Five S4C

Source: Ofcom/broadcasters

Figure 2.50 Performance against Current Affairs quotas, peak time

Quota Achieved 2004 Achieved 2005 Achieved 2006 Achieved 2007 Achieved 2008

150

100 117 113 126 122 119 117 117 113 112 110 Hours per year per Hours 50 105 64 80 63 59 56 55 45 45 14 15 44 42 41 10 35 10 21 10 30 0 BBC One & Two ITV1 Channel 4 Five S4C

Source: Ofcom/broadcasters

2.2.16 Programmes made for viewers in the nations and English regions

All channels exceeded the quotas in 2008

Regional programmes are non-networked programmes, made in the nations and English regions specifically for local audiences. They are mainly shown on ITV1/STV/UTV and BBC One, with some also available on BBC Two.

The ITV quotas are standardised across most of the English regions and in 2008 were fixed at 6 hours 50 minutes a week in total, of which News was set at 5 hours 20 minutes, Current Affairs at 26 minutes and other regional programmes at 1 hour 4 minutes a week. Lower quotas apply in the two smallest regions – Border and Channel. Figure 2.51 shows the average amounts achieved per week over the past five years in all ITV English regions. In 2007 ITV1 reduced the length of its weekday regional lunchtime news and failed to deliver against the quotas. Following Ofcom’s intervention, delivery against the quota was achieved

112

from September 2007 and for the full calendar year 2008. The apparent shortfalls of a few minutes a week, which are shown in Figure 2.51, are the result of the lack of advertising minutage around some regional programmes, particularly in peak time, which reduced the amount of time allocated to regional programmes. Ofcom is satisfied that the quota requirements were met in full when these anomalies are taken into account.

Following Ofcom’s second PSB Review, ITV1 will increasingly prioritise prime-time regional news, and volumes during daytime will be reduced. From 2009 onwards the minimum quota for regional non-News programmes will be cut from 30 minutes to 15 minutes on average a week in each of the English regions. There will also be changes in the pattern for regional News and a sharing of some material between certain neighbouring regions. As a result of the recommendations of the Government’s Digital Britain report, proposals are being developed for news consortia to bid for contracts to provide regional news to the Channel 3 schedule.25

Figure 2.51 England ITV1 licensees’ non-network performance Average hours of regional programming per week 2004 2005 2006 2007 2008 12:00

8:00 8:33 8:33 8:33 8:31 8:31 8:29 8:29 8:29 4:00 8:27 7:18 7:17 7:17 7:17 7:16 7:15 7:15 7:14 7:13 6:46 6:46 6:45 6:45 6:45 6:45 6:44 6:43 6:43 6:42 6:41 6:41 6:41 6:40 6:40 6:40 6:39 6:38 6:18 6:18 6:18 6:18 6:18 6:17 6:17 6:17 6:16 6:14 6:08 6:03 6:02 5:45 5:42 5:38 5:30 5:29

0:00 West Anglia Border Central London Channel Meridian Granada Yorkshire Tyne Tees Tyne

Westcountry

Source: Ofcom/Broadcasters

In the devolved nations, quotas for non-network programmes are set at higher levels than those in the ITV English regions, and are standardised at 9 hours 20 minutes a week each in Scotland, Wales and Northern Ireland. Figure 2.52 shows the amounts broadcast in the past five years in each of the nations.

The quota for Scotland Central and Scotland North includes separate production requirements in each part of the region for News programmes, with joint requirements applying to non-News output, allowing programmes to be shared by the two licensees. Figure 2.52 shows the average number of hours broadcast, excluding any double-counting. The introduction of a new news and general interest magazine programme on weekdays, The Five Thirty Show, has contributed to an increase in the volume of hours produced in the Scotland Central region in 2008.

From 2009, as a result of Ofcom’s second PSB Review, ITV1/STV/UTV will prioritise prime- time non-network News, and consequently the volume during daytime will be reduced. The quotas for non-News programmes in Scotland and Wales will be cut from 3 hours to 1½ hours per week, and in Northern Ireland it will reduce to 2 hours, although peak time in all cases will remain unchanged.

25 For more details about non-network programmes, see Ofcom’s Communications Market Report: Nations and Regions 2009.

113

Figure 2.52 Nations Channel 3 licensees’ non-network performance Average hours of regional programming per week

12:00 2004

2005 08:00 2006 12:32 9:59 9:57 10:23 9:31 9:27 10:16 9:41 9:17 9:09 9:04 8:59

04:00 8:38 7:53 7:18

7:29 2007 7:07 7:03 6:45 6:29

2008 00:00 Scotland Scotland North Wales UTV Central

Source: Ofcom/broadcasters

The BBC does not have separate quotas for each of the English regions and nations; the quota set by the Trust refers to the amount of regional programming to be produced across the UK as a whole. This totals 6,580, which was comfortably exceeded in each of the past five years, with 7,212 hours delivered in 2008, almost 10% above the quota minimum. The separate quotas for regional news on BBC One for the whole day and for peak time, as well as other peak-time programmes, excluding BBC One’s peak-time News, were also exceeded. The totals achieved over the past five years against the quota levels are shown in Figure 2.53.

Figure 2.53 The BBC’s performance against nations and regions quotas

Quota Achieved 2004 2005 2006 2007 2008

8,000

6,000

4,000 7,226 7,212 7,073 7,048 6,815 6,580 4,799 2,000 4,769 4,656 4,622 4,400 1,060 1,148 1,145 3,920 1,084 1,030 1,069 2,355 2,290 2,245 2,217 2,156 2,010 0 All regional programming BBC One regional news BBC One regional news in Regional programming in peak peak excl. news on BBC One

Source: Ofcom/broadcasters

2.2.17 Repeats

Proportion of repeats edges up

Viewers have often raised concerns about the levels of repeats on screen, so while there are no quotas limiting the number of repeats shown, it is useful to compare figures for the PSB channels. Figure 2.54 illustrates the position for the past three years. Across the whole day, levels of repeats on BBC One have increased by one percentage point, from 25% in 2007 to 26% in 2008, while decreasing on BBC Two from 42% to 41% over the same period.

114 Repeats on the commercial PSB channels show a more consistent upward trend. On Channel 4, the proportion increased from 44% in 2006 to 50% in 2008, on Five from 43% to 49%, while on ITV1 (excluding GMTV) the level jumped to 31% in 2008 from 23% in the previous two years, mostly because of higher volumes of repeats in the late-night schedule. Repeat levels on S4C reduced in 2008 from 56% overall in 2007 to 49%. On the BBC’s digital channels rather higher levels of repeats are screened, particularly on the children’s channels, where programmes are designed to be repeated often. The repeat rate reach was over 90% on CBBC and CBeebies.

In peak time the percentages of repeats are much lower, particularly on BBC One and ITV1/STV/UTV, and are generally in single figures. BBC One reported 8% in 2008, up a little from 7% in 2007 while the level for ITV dropped to 7% in 2008, down from 9% and 10% in the previous two years respectively. The proportion of repeats shown by Channel 4 edged up from 21% in 2007 to 22%, while Five’s figure jumped to 41%, compared with 29% in 2006 and 33% in 2007. There was a reduction on S4C from 33% in 2007 to 30% in 2008.

Figure 2.54 Proportion of repeats, 2006 to 2008

All day Peak time

2006 2007 2008 2006 2007 2008 100

75 ts a e p50 2 5 5 6 e 1 9 9 9 9 41 r 2 0 5 1 9 8 8 8 6 6 8 6 3334 33 % 7 7 7 29 30 6 26 0 4 5 23 22 21 22 25 6 4 6 5 5 9 5 9 19 4 2 1 4 4 3 4 4 4 4 4 1 4 8 5 6 3 3 3 9 8 9 10 2 2 2 2 2 7 7 0

Source: Ofcom/broadcasters. Note: Excluding programmes first shown on another PSB channel *Excluding schools programmes

2.2.18 European programming

All PSB channels exceeded quotas

The requirements to broadcast minimum amounts of European programmes are standard for all broadcasters across Europe, and apply to all operators, including PSBs and multichannels. They derive from the European Commission’s Audio-visual Media Services (AVMS) Directive and require that, where practicable, a majority of programmes (more than 50%) are European; that at least 10% are made by European independents; and that at least 50% of these have been made within the past five years.

Figures for all channels are published by the European Commission and results for the UK PSBs are shown in Figure 2.55. All PSB channels exceeded the minimum quota levels, usually by wide margins.

115 Figure 2.55 Performance against European programming requirements, 2008

Proportion of transmitted programmes (%)

European programmes European independents Recent works 100%

80%

60% % % % 0 0 % 0 % 0 % 0 % % % % % % 9 0 % % % 8 % % 1 % 0 % 1 3 5 8 5 8 5 9 1 9 1 % 2 9 9 40% 4 2 9 6 9 9 8 9 8 9 8 9 6 9 8 % 8 8 8 % 8 2 0 % % % 7 % 7 6 2 6 0 % % 5 6 5 20% 5 0% % % 5 % % % 10 2 2 4 % 4 4 % 1 5 3 3 5 3 3 4 3 2 1 0%

Source: Ofcom/broadcasters

2.2.19 Other compliance matters

Listed events

A number of key sporting and other events, considered to be of major national interest, are designated by the Secretary for Culture Media and Sport as ‘listed events’. The purpose of these arrangements is to ensure that they are made available on free-to-air channels so that all viewers have access, particularly those who cannot afford subscription television. In March 2008, Five was added to the list of Category A broadcasters (those which must be given a genuine opportunity to acquire the rights to broadcast listed events).26 Broadcasters are prevented from acquiring exclusive rights and from transmitting coverage of such events on a live and exclusive basis without Ofcom’s prior consent. In 2008 there were no instances of any broadcaster failing to comply with the Code on Listed Events.

Ofcom Broadcasting Code on Fairness and Privacy

The fairness and privacy sections of the Ofcom Broadcasting Code set out how broadcasters should treat individuals or organisations that are directly affected by a particular programme. This applies to people who have either appeared in, or been mentioned in, a programme, or who have a specific interest in the subject matter of a programme, rather than the generally-accepted standards which apply to programmes in order to avoid causing harm and offence to the general public.

Ofcom concluded 213 Fairness and Privacy complaints in 2008. Of these, 71 were adjudicated upon by Ofcom, with five Upheld, 19 Partly Upheld and 47 Not Upheld. Most of the remaining 142 complaints were not entertained (i.e. could not be considered by Ofcom either because they did not fall within its remit for Fairness and Privacy or because Ofcom was prevented from considering them under the applicable statutory criteria). However, in a small number of cases, complainants accepted an offer of Appropriate Resolution which had been volunteered, on a without prejudice basis, by the broadcaster concerned.

26 Further information can be found at: http://www.ofcom.org.uk/tv/ifi/channel5/

116 TV access services

In 2008, 84 channels were required to provide subtitling, signing and audio description (‘television access services’) in accordance with Ofcom’s Code on Television Access Services, compared with 91 channels in 2007. These 84 channels included all the public service channels, as well as digital channels featuring general Entertainment, Film, Sports, Documentaries, Children’s programmes, and Popular Music. The quotas apply to all PSB channels and all other television services which achieved an average audience share over a 12-month period of 0.05% or more, subject to passing an affordability threshold and not facing technical difficulties that cannot be overcome, such as the audio-description of Music and News programmes, where there is little space within the dialogue or sound-track to provide audio-description. A full list of channels that provided television access services during 2008 can be found at: http://www.ofcom.org.uk/tv/ifi/guidance/tv_access_serv/tv_access_statement08/

Almost all broadcasters met their obligations in full in 2008; the three that did not (GMTV2, National Geographic and Cartoon Network) are required to make up the shortfall during 2009. These amounts were added to the 2009 targets and are shown in the access service reports. A report showing the performance of television channels against the targets applying in 2008 and 2009 can be found at http://www.ofcom.org.uk/tv/ifi/guidance/tv_access_serv/tvaccessrep/

Intellectual property

The Communications Act 2003 requires Ofcom to report on any issues relating to intellectual property in programmes that have arisen, or been of significance. In 2008 no such issues were brought to Ofcom’s attention.

Training

Ofcom’s co-regulator, the Broadcast Training & Skills Regulator (BTSR), is responsible for the regulation of training in television and radio. The BTSR brings together training and development expertise from within and outside the sector, working with broadcasters, trade associations and Skillset (the Sector Skills Council for the Audio Visual Industries). Its aim is to help the industry to continue to improve and to provide relevant, inclusive and cost- effective training and career development opportunities for employees and freelancers. Training and development is important, not only because it affects the quality of programmes for audiences, but also because it affects the long-term success of UK broadcasting. However, we note that as a result of the economic downturn, some broadcasters may be reconsidering their support for funding of external training bodies. The BTSR continued to develop its self-evaluation assessment system in 2008, against which broadcasters rate their own performance according to guidelines developed in consultation with the industry. As in previous years, this was complemented by visits to selected radio and television broadcasters, to independently validate the self-evaluation reports. Details of the validation process and the results can be found on the BTSR’s website (www.btsr.org.uk).

Equal opportunities

Ofcom is required to ensure that all but the smallest broadcasters make arrangements for promoting equal opportunities in employment, regardless of gender, race and disability. This is done through an annual reporting process and by providing guidance to broadcasters on policies and procedures. In 2008, Ofcom published a summary report of information provided by broadcasters regarding their equal opportunities arrangements during 2007.

117 Following extensive public consultation, and further discussions with the broadcasting industry, it was decided that the BTSR would undertake the task of co-regulation of equal opportunities arrangements. This started on 1 April 2009, with an industry-led planning group working in partnership with the BTSR to develop the co-regulatory approach. The group will be supported by an advisory group, comprising stakeholders representing women, disabled people and people from ethnic minorities. In the meantime, Ofcom has collected information from broadcasters in respect of their equal opportunities arrangements for 2008, for analysis by the BTSR which will publish a report on the outcomes later in 2009. In future, the BTSR will collect information directly from broadcasters. More information is available at: http://www.btsr.org.uk/EqualOpps.

118 2.3 The television viewer

2.3.1 Summary

In this section we examine the main trends among television viewers during 2008 by analysing the availability and take-up of digital television platforms, the patterns of consumption among television viewers, channel shares and audience demographics, and consumer attitudes towards content.

The key points in this section include:

 By the end of Q1 2009, take-up of multichannel television on main sets had increased by 2.4 percentage points year on year to stand at 89.6% (page 121).

 In multichannel homes, the five main PSB channels shed 1.2% (0.7 percentage points) of their audience share during 2008, but their portfolio channels all continued to grow. As a result, the combined share of the five PSB channels and their portfolio channels rose by 1.6 percentage points to reach 71.9% in 2008 (page 133).

 The aggregate audience share of channels in the Entertainment genre is continuing to grow. The genre’s multichannel share totalled 21% in 2008, up by seven percentage points since 2003 (page 140).

 Just 35% of analogue-only viewers are now aged 44 or under, compared to 53% of the UK population (down by four percentage points on 2007). It is possible that the analogue television viewing universe is growing older, because younger viewers are migrating to digital television platforms more rapidly (page 142).

 The proportion of viewers who believed that TV content had ‘got worse’ over 2008 increased with age, with viewers in the 65+ category being twice as likely to hold this view (46%) as 15-24 year olds (19%) (page 144).

2.3.2 Availability of multichannel broadcast platforms

UK viewers have a choice of five main platforms for receiving television – analogue terrestrial, digital terrestrial, cable, satellite and IPTV. The availability of the platforms differs considerably (Figure 2.56). Analogue terrestrial television is available to almost all of the UK population. Among digital television platforms, digital satellite reaches 98% and digital terrestrial television (DTT) 73%.

Cable television is currently available to just under half the population (49%). However, in May 2009, Virgin Media announced that it had identified 500,000 homes that would be linked to its cable network, of which 50,000 are to be added in 2009.

When larger regions begin digital switchover from later this year the availability of DTT will start to increase and should match analogue coverage once full switchover is complete in 2012. Tiscali TV, available to 10 million (39%) of the population is the only operator to deliver live television channels over its IPTV network. It offers a range of television subscription

119 services to consumers in a number of cities. BT Vision’s live television channels are delivered using DTT27 while on-demand content is delivered over the broadband connection.

Figure 2.56 Availability of television platforms

Proportion of population covered (%) 100%

80%

60% 99% 98% 40% 73% 49% 20% 39%

0% Analogue terrestrial Digital satellite Digital terrestrial Digital cable IPTV television television television television Source: Ofcom research/operators

Each of the three main digital platforms offers a free-to-view service. Freeview is available via terrestrial TV, while satellite now offers two main non-subscription options including: Freesat from ITV/BBC and Freesat from Sky.

Cable customers can also receive a free TV service as part of a combined package, but still have to pay a monthly line rental charge to access this service. Consumers can subscribe to additional channels if they choose via Top Up TV on DTT, Sky on digital satellite and Virgin Media and other small cable operators.

2.3.3 Digital TV take-up

Take-up on main television sets slowed in 2008

By the end of Q1 2009, take-up of multichannel television on main sets in UK households had increased by 2.4 percentage points year on year, to stand at 89.6% (Figure 2.57). DTT and pay digital satellite continued to be the two most common ways of receiving television on main sets28, followed by digital cable and then free-to-view digital satellite.

27 BT Vision is not classed as an IPTV service in our figures because its live scheduled services are broadcast through DTT rather than by broadband. BT Vision homes are therefore included in DTT homes. 28 There are around 60.2 million television sets in the UK, of which around 25.4 million are ‘main’ sets (which broadly equates to the most-watched set in each TV household), and approximately 34.9 million are ‘secondary’ sets (in bedrooms, kitchens, etc).

120 Figure 2.57 Take-up of multichannel television on main sets

% of homes 27.2% 34.0% 41.7% 44.7% 48.0% 56.7% 64.9% 71.8% 80.3% 87.2% 89.6% TV Households (m) 26 Data from Q1 2007 is based 24 on consumer research Digital terrestrial 22 only 20 18 Analogue cable 16 14 Digital cable 12 10 Free-to-view 8 digital satellite 6 Analogue satellite 4 2 0 Pay digital satellite Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 Q1 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: GfK research from Q1 2007 onwards; previous quarters use platform operator data, research and Ofcom estimates. Note: Digital terrestrial relates to DTT-only homes

Figure 2.58 sets out the net additions of main television sets to DTT, satellite and cable over the twelve months to Q1 2009. The number of main sets connected to DTT rose by just 200,000 during the year, compared to an increase of 1.3 million the year before.

Pay platform subscriber additions rose at a higher rate, with BSkyB adding 358,000 net subscribers and Virgin Media attracting a further 137,000 over the year (both up slightly on the previous year’s additions of 332,000 and 125,000 respectively). According to our survey results, free satellite platforms grew by 311,000 additions over the period.

Figure 2.58 DTT, satellite and cable net additions, year to Q1 2009 Subscribers/Households added (thousands) 400

300

200 358 311 100 200 137

0 DTT-only additions Pay-satellite additions Free-to-air satellite Cable additions additions Source: Cable additions relate to Virgin Media reported results, pay-satellite additions are Ofcom estimates based on BSkyB results. Free satellite additions based on BBC/ITV Freesat sales figures. DTT additions taken from GfK consumer research. Note: ‘DTT-only additions’ are first-time DTT acquirers who have no other multichannel platform in the home.

121 All television sets

Around 73%, or 44 million, of the 60 million television sets in the UK (both main and secondary), had been converted to multichannel by Q1 2009, up by 5.7 percentage points in a year.

Figure 2.59 illustrates that analogue terrestrial television accounted for just over a quarter of the total set universe (27%) in Q1 2009, equivalent to around 16.2 million television sets (around 2.7 million main and 13.5 million secondary sets). This was down by around five percentage points from 32% twelve months earlier.

The number of sets receiving a signal through a digital terrestrial decoder rose by around 2.7 million over the year to 26.1 million, equivalent to a 43% share of all sets (up by four percentage points year on year). Survey results indicated that over a fifth (22%) of all television sets are now connected to a pay-satellite service, up by one percentage point year on year, and there were around 3.7 million sets (6.1%) connected to cable by Q1 2009, broadly in line with the figure a year earlier.

Figure 2.59 Platform share among all TV sets for Q1 2009 Total TV sets = approximately 60 million

Analogue terrestrial, Pay satellite, 21.5% 27.1%

Free-to-view satellite, 0.8% Cable, 6.1% ADSL, 0.2%

Digital terrestrial, 43.4%

Source: GfK research for Q1 2009. Note: Figures may not add up to 100% owing to rounding

The share of sets that different digital television platforms attract varies by set number, as illustrated by Figure 2.60. In Q1 2009 satellite (free and pay) and DTT had a similar share of main sets, at 37% and 38% respectively. However, on second and third sets, DTT was the most widely-used platform, with take-up of 48% in each case; this was 12 and eight percentage points higher than the next most commonly used platform, analogue terrestrial. (Note: sets are classified as ‘main, 2, 3 or 4’ purely according to the way consumers describe their sets. The classification does not refer to any particular framework for prioritisation; for example location in a particular room or spend on set).

122

Figure 2.60 Platform shares by platform, TV sets 1 - 4

Main TV Set TV Set 2 TV Set 3 TV Set 4 100% 15 13 12 11 24 19 26 Analogue 37 36 40 80% 45 44 44 46 54 49 51 terrestrial 37 38 64 60 63 58 62 33 37 38 70 68 71 67 60% 27 29 76 77 DTT 12 11 11 11 11 40% 12 12 47 48 40 48 39 45 45 43 25 30 39 19 25 30 28 13 19 17 22 20% 35 36 36 37 37 37 37 12 12 Cable 3 3 3 3 3 3 3 2 2 2 2 3 2 3 1 2 2 2 1 2 2 14 14 13 13 12 12 13 10 11 10 10 9 9 9 10 10 9 9 9 9 8

0% Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Q1 2006 Q3 2006 Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009

Satellite

Source: GfK research

DTT device sales

The number of DTT devices used on secondary sets overtook the number used on primary sets during 2008. By the end of Q1 2009 there were 26.1 million DTT-enabled sets, of which 9.8 million were primary and almost 16.3 million were secondary sets, resulting in 62% of all DTT devices now being connected to secondary sets (Figure 2.61).

Figure 2.61 DTT on primary and secondary sets DTT on primary and secondary sets (millions)

18 16 14 12 DTT primary set 10 8 16.3 13.7 6 DTT 9.6 9.8 secondary 4 8.4 8.3 set 6.4 2 5.0 4.9 1.7 0 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009

Source: GfK research

Over the past year around 12.7 million DTT units have been sold, compared to around 11.7 million in the previous year, an increase of 8.5%. In Q1 2009 alone, DTT-enabled equipment sales reached almost 3.4 million units, up by 7% on the Q1 2008 figure. Integrated digital television sets (IDTVs) accounted for almost 73% of these sales (2.5 million units - around 93% of TV sets sold now include a digital tuner). Freeview set-top boxes made up the remaining 27% (900,000 units), although sales were down 28% year on year, as integrated TVs have become increasingly popular.

123 Figure 2.62 DTT quarterly and cumulative sales since launch of Freeview

Quarterly sales (m) Cumulative DTT Sales (m) 3.5 50 Set-top boxes 45 3.0 IDTV sales 40 Cumulative sales 2.5 35 30 2.0 25 1.5 20

1.0 15 10 0.5 5

0.0 0 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2005 2005 2006 2006 2006 2006 2007 2007 2007 2007 2008 2008 2008 2008 2009

Source: Sales figures from GfK, as adjusted by Freeview

2.3.4 Consumption of television services across the day

Average TV audiences at weekends are generally larger than on weekdays

The average weekday TV audience peaked at just over 24 million viewers at 21:15 – 21:30 in the evening during 2008; at weekends, the peak came earlier (at 20:45 – 21:00) and was higher at 25 million (Figure 2.63).

The weekend average audience was typically higher at all times of the day than on weekdays. The exception was 05:15 – 08:30 where a weekday audience peak of 5.4 million at 08:00 – 08:30 was driven by children (see the following analysis). Weekday audiences peaked at just over 7 million viewers over lunchtime but remained lower than the weekend equivalent throughout the period.

124 Figure 2.63 Average 2008 audiences, weekdays/weekends: by day part, all homes Average audience (millions)

16 Weekend 12 Weekday

0 3am 6am 6am 9am 12pm3pm6pm9pm12am

Source: BARB

Patterns of viewing, by time of day and age

The average weekday audience by day part and age is illustrated in Figure 2.64. Four trends stand out:

 there were more TV viewers over 65 than in any other age group at most times of the day. Among this age group, there was a small broad breakfast peak at 08:45 – 09:15, a lunchtime peak at 13:15 – 13:45 and a broad evening peak from 18:00 – 22:00 (defined here as the interval where the audience exceeds 5 million);

 the 16-24 audience was the least likely of any adult age group to watch TV at any time of the day and was the only audience in 2008 where the peak time average failed to reach 2 million viewers;

 third, there was a substantial increase in the size of the peak-time viewing audience aged 25-34 when compared to 16-24s, possibly reflecting the changing life circumstances of people in the older age band; and

 the children’s audience was unique in exhibiting a sharp well-defined peak at breakfast and in watching television in large numbers for a comparatively sustained period of time between 18:00 and 20:30. Unsurprisingly, the children’s audience peak was earlier than average.

125 Figure 2.64 Average 2008 weekday audiences, by day part and age, all homes Average audience (millions) 6

5 Children 16-24 4 25-34

3 35-44 45-54 2 55-64

1 65+

0 6am 12pm 6pm 12pm 6am

Source: BARB

Many of the trends in weekday viewing were reproduced at weekends (Figure 2.65). For example, there was still a morning peak for children in 2008, while people over 65 still watched TV in larger numbers than any other adult age group for much of the day. But the viewing peaks for both audience groups tended to be higher at the weekends (6 million for people over 65 and 2.4 million for children) while they were broadly similar in size for other audiences.

Figure 2.65 Average 2008 weekend audiences, by day part and age, all homes Average audience (millions) 6

5 Children 16-24 4 25-34

3 35-44 45-54 2 55-64

1 65+

0 6am 6am 12pm 6pm 12am

Source: BARB

2.3.5 Channel reach

Figure 2.66 illustrates how the collective reach of multichannel services rose by 29 percentage points (or 67%) to 74% between 2003 and 2008. In this section reach is defined

126 as the proportion of viewers who watch a particular channel for at least fifteen consecutive minutes over a period of a week (fifteen-minute weekly reach).

This growth meant that the combined reach of multichannel services exceeded that of any one individual PSB channel except BBC One, and surpassed ITV1 for the first time in 2008. Concurrently, the reach of all PSB services fell over the same period, with BBC Two and ITV1 experiencing the greatest absolute reductions – ten percentage points each – to stand at 58% and 69% respectively in 2008. The reach of Channel 4, BBC One and Five fell by six, six and two percentage points each respectively over the same period. Year on year, however, BBC Two’s fortunes appeared more positive; for the first time since 2003, its reach exceeded that of Channel 4/S4C.

Figure 2.66 Average weekly TV reach in all homes, by channel 15-minute consecutive weekly reach – full weeks

90% 84% 82% 80% 78% 78% 80% 79% 79% BBC One 77% 74% 74% 71% 70% 70% 68% 69% 63% 63% 64% 69% BBC Two 61% 59% 58% 60% 63% 62% 60% 50% 57% 57% 58% 57% ITV1 50% 45%

40% 43% 44% 44% 42% 40% 41% C4 + S4C 30% Five 20% 10% Multichannels 0% 2003 2004 2005 2006 2007 2008

Source: BARB

Figure 2.67 breaks down TV reach by age. Viewing among people in the older age groups, where reach is highest, has remained relatively stable over the past few years. By contrast, TV reach among younger audiences (which was already lower than average) has been in decline since at least 2003, falling by four percentage points among 16-24 year olds and by two percentage points among 25-34 year olds, to 82% and 91% respectively in 2008. The younger adult age group may be spending less time watching TV as they divide their time between an expanding range of media consumption opportunities (for example, social networking sites, downloading and listening to music or watching video clips and TV online).

127 Figure 2.67 Average weekly TV reach in all homes, by age 15-minute consecutive weekly reach – full weeks

100% 97% 96% 96% 96% 96% 96% Children 90% 92% 91% 90% 89% 91% 90% 80%86% 85% 84% 83% 83% 82% 16-24 70% 25-34 60% 50% 35-44 40% 45-54 30% 20% 55-64 10% 0% 65+ 2003 2004 2005 2006 2007 2008

Source: BARB

2.3.6 Viewing share among the five main PSB channels

Multichannel viewing share in all homes, all day, continued to climb during 2008, reaching 39% thanks to the growing popularity of digital television platforms and multichannel services (Figure 2.68). Year on year, multichannel share expanded by 6%, and since 2003 it has risen by 64%. As a result, the five main PSB channels (BBC One, BBC Two, ITV1, Channel 4/S4C and Five) have all, to a greater or lesser degree, experienced reductions in viewing share over the same period.

The television broadcasting landscape has been transformed by the widening availability of digital television platforms. This can be seen by comparing 2008 channel shares with those from 1982 – the year when Channel 4 launched. At that point, ITV attracted a 50% share of viewing in all homes, while BBC One was the nation’s second favourite channel with a 38% share; BBC Two accounted for the remaining 12% of viewing. BBC Two’s share over this 26- year period has fallen by a third and stood at 8% in 2008; moreover, BBC One has been more effective than ITV1 at maintaining its share – although both experienced substantial reductions over the period, of 43% and 63% respectively.

128 Figure 2.68 Channel shares in all homes, 1982 to 2008 Audience share

70% BBC One 60% BBC Two 50% ITV 1 40%

30% Channel 4 + S4C 20% Five 10% Others 0% 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008

Source: BARB, TAM JICTAR and Ofcom estimates

PSB channels’ share decline continues in all homes

The five main networks attracted a share of 60.8% in all homes during 2008, down by 2.7 percentage points, or 4.3%, year on year, although there are signs that the rate of decline is slowing (the networks experienced a 4.8% reduction in share between 2006 and 2007). Since 2003, their share has fallen by one-fifth, in the face of growing competition from multichannel services (Figure 2.69).

Since 2007, Channel4/S4C has lost proportionally the most share, shedding 0.8 percentage points, or 9% of its total, during 2008. BBC Two viewing share contracted by 8% over the same period, while ITV1 and Five’s share each fell by 4%. BBC One was the most successful of all the main PSB channels at maintaining share during 2008, losing just 0.2 percentage points over the period.

Over a five-year period, BBC Two lost the largest proportion of its share, down by nearly one-third (29%). ITV1, Channel4/S4C and Five each shed around one-fifth of their shares over the same period (22%, 19% and 23% respectively). Once again, BBC One proved most successful at maintaining its audience in the face of multichannel competition, with its share falling by just 15% over the same period.

129 Figure 2.69 Five main networks’ audience share, all homes Audience share 76.5% 73.8% 70.4% 66.7% 63.5% 60.8% 80% 6.5% 70% 6.6% 6.4% 9.6% 5.7% Five 9.8% 5.2% 60% 9.7% 5.0% 9.8% 8.6% 7.8% 50% 23.7% Channel 4 + 22.8% 21.5% S4C 19.7% 40% 19.2% 18.4% ITV1 11.0% 30% 10.0% 9.4% 8.8% 8.6% 7.8% 20% BBC Two

25.6% 24.7% 23.3% 22.8% 22.0% 21.8% 10% BBC One 0% 2003 2004 2005 2006 2007 2008

Source: BARB

While the five main PSB channels attracted a 61% share of all viewer hours in all television homes during 2008, this varied significantly by platform (Figure 2.70). The channels commanded a monopoly over viewing in homes that receive television services through an analogue tuner, but compete to varying degrees for audiences’ attention in digital terrestrial (DTT), cable and satellite homes.

By March 2009, the share of the five PSB channels in DTT homes had reached 62% (compared to 59% in all homes), and over the last nine months it seems that the share reductions of the previous six years were tailing off. Share was down by 12 percentage points since March 2006, but by just one percentage point in the twelve months to March 2009.

The picture in cable and satellite homes was different. The five channels attracted substantially less share when compared to DTT homes – 47% in March 2009 compared to 62%. Nevertheless, their position in cable/satellite homes was in some senses better- established in 2008, because share had remained relatively stable over a period of time – down by just three percentage points since March 2006.

130

Figure 2.70 Five main networks’ share, by platform Audience share 100% 100% Terrestrial 77% homes 80% 74% 68% 63% 72% 62% Digital 60% 68% 62% 65% 60% Terrestrial 59% homes 52% 40% 50% 49% 47% 47% All homes

20%

Cable and 0% satellite homes 05 06 08 07 05 06 07 08 06 07 08 05 06 07 05 08 09 ------Jun Jun Jun Jun Mar Mar Mar Mar Mar Dec Dec Dec Dec Sep Sep Sep Sep

Source: BARB, all day, all viewers, various platforms

The five main PSB channels’ success at holding their audiences varied by platform during 2008 (Figure 2.71). In analogue homes, BBC One and ITV1 attracted a higher viewing share, while Channel 4/S4C lost 7% of its share. This might be explained by the changing demography of the analogue television viewing universe, which has an over-representation of older people.

In DTT homes, BBC One broadly maintained its share (falling by 1% over the period); ITV1’s share fell by 5% but BBC Two and Channel 4/S4C experienced the largest reductions, of 9% and 14% respectively. Channel 4/S4C also incurred substantial losses in share in cable and satellite homes, where share fell by 11% and 13% respectively. By contrast, in cable and satellite homes the share reductions for BBC Two and ITV1 were less dramatic, and BBC One’s share actually rose by 2% in cable homes and 1% in satellite homes.

Five’s performance by platform was perhaps the most varied among the five main PSB channels. Like other PSBs, it lost substantial share in DTT homes (7%); in cable homes its share fell by 3%, while among satellite viewers it managed to increase its share by 7%.

The impact on multichannel services similarly varied by platform. In cable and satellite homes there was a redistribution of share among the PSB channels, while the multichannels picked up just 1% of additional share year on year. By contrast, the multichannel operators were the main beneficiaries of falling PSB share in Freeview homes, with their claim on all viewer hours rising by 7% during 2008.

131 Figure 2.71 Channel share by platform, 2008

Analogue terrestrial Digital terrestrial Digital cable Digital satellite

% change in channel share by platform 2007-2008

BBC One BBC Two ITV1 Channel 4 + S4C Five Other

3%-1% 2% 1% -3%-9% -4% -4% 2% -2%-5%-2% -7%-14% -11% -13% -4% -3%-7% 7% 7%1% 1% % % .7 60% .7 2 9 5 4 % % 5 .7 . 5 40% 4 % 3 3 .2 % 8 .1 2 % 3 % % % 8 % 2 .1 .4 9 . .1 % 7 7 . 8 7 .0 % 20% 1 1 5 1 1 5 .3 1 % 1 3 2 % % 1 % % % % % . 5 3 .6 8 7 .4 5 % % 8 . . 7 . . 7 . .2 .5 5 5 5 5 5 4 3 0% BBC One BBC Two ITV1 C4 + S4C Five Other

Source: BARB

2.3.7 Multichannel broadcaster share

The PSBs’ portfolio channels increase their audience share

In multichannel homes, the five main PSB channels shed 1.2% of their audience share during 2008 (Figure 2.72). But their portfolio channels (BBC Three, BBC Four, CBeebies, CBBC, BBC News, BBC Parliament, ITV2, ITV3, ITV4, CiTV, Men & Motors,GMTV2, E4, More4, Film4, 4Music, Fiver, Five USA) all continued to attract a growing share of viewing. As a result, the combined share of the five PSB channels and their portfolio channels rose by 1.6 percentage points, or 2.3%, to reach 71.9% in 2008. Over the five-year period, the share of the five main PSB channels has fallen by 2.0%, while their portfolio channels have more than doubled their share, from 7.3% to 15.9% over the same period. The portfolio share figure has experienced several substantial ‘jumps’ over the past five years, most notably when Channel 4 moved E4’s business model from a subscription to an advertising model in 2005 and then did the same with Film4 in 2006.

132 Figure 2.72 PSB and portfolio channel shares in multichannel homes Audience share 100%

33.1% 31.2% 29.7% 28.1% 80% 35.6% 35.1% Other digital channels 11.3% 13.6% 15.9% 60% 7.3% 7.4% 9.2% PSB portfolio channels 40%

57.2% 57.5% 57.7% 57.6% 56.7% 56.0% PSB Channels 20%

0% 2003 2004 2005 2006 2007 2008

Source: BARB

Year on year, Five’s channel portfolio experienced the largest increase in audience share, rising by 5.5%, followed by Channel 4 with 4.8% and the BBC with 1.8%; ITV1’s share remained more stable over the period, growing by just 1.2% (Figure 2.73). Over the five-year period, Channel 4’s proportional increase in portfolio share was higher than for any other PSB operator. It has risen by nearly 43% since 2003, while Five’s has grown by 26%; the BBC’s share increased by 8% while ITV’s grew by just 1.9% over the same period.

The success of the PSB portfolio channels in attracting viewer hours has put pressure on the share of the remaining multichannel operators. Among the larger operators of channel portfolios, beyond the PSBs, BSkyB bore the brunt of the reductions in viewing share. Its collective share of viewing fell by 11% year on year, and by 42% since 2003. Viacom’s share (which includes the MTV, VH1 and Nickelodeon networks) has contracted by 2% since 2007 and by 25% since 2003, while UKTV managed to hold on to a greater proportion of its portfolio share, experiencing reductions of just 1.3% in twelve months and 6.3% over the past five years.

133 Figure 2.73 Broadcaster portfolio shares in multichannel homes Audience share CAGR (%) 100% 1year 5year 13.7% 14.0% 12.9% 12.8% 12.3% 14.3% -4.4% -2.1% Other 2.6% 2.6% 2.7% 2.6% 2.8% 2.8% 2.6% 3.5% 3.1% 2.9% 2.7% 80% 3.4% 3.9% 3.9% -5.2% -0.1% Virgin 4.1% 4.2% 4.0% 4.0% 7.6% 6.8% Media 9.3% 8.7% 11.7% 10.4% 5.9% -1.9% -5.6% Viacom 5.1% 5.6% 4.7% 5.1% 5.3% 11.7% 60% 11.2% 11.2% -0.8% -1.3% UKTV 8.2% 8.6% 9.6% -11.4% -10.4% BSkyB 22.6% 40% 22.1% 21.7% 22.1% 22.0% 22.3% 5.5% 4.7% Five

4.8% 7.4% Channel 4 20% 29.4% 29.5% 29.8% 30.6% 31.2% 31.8% 1.2% 0.4% ITV

BBC 0% 1.8% 1.6% 2003 2004 2005 2006 2007 2008

Source: BARB

Within the BBC’s channel portfolio, its two main channels have managed to maintain their share of viewing in multichannel homes over the past five years (Figure 2.74). Together they attracted 27.4% of all viewer hours in 2008, up from 27.0% in 2007 and by 1.1 percentage points, from 26.3%, since 2003.

The BBC’s digital-only channels contributed a further 4.4 percentage points of share in 2008, up from 4.2% in 2007 and from 3.1% in 2003; their principal growth driver has been BBC Three, whose share has doubled from 0.6% five years ago to 1.2% in 2008. Over the same period, CBeebies has made a consistent and substantial contribution to the BBC’s digital channels’ share, having rapidly established itself in the children television category soon after its launch in 2002.

134 Figure 2.74 BBC portfolio share in multichannel homes Audience share

29.4% 29.5% 29.8% 30.6% 31.2% 31.8%

0.5%1.3% 0.6% 1.3% 0.6% 30% 0.6% 1.2% 0.8% 1.2% 1.3% 0.5% 1.3% 0.6% 0.8% 0.6% 1.0% 0.4% 1.1% 0.4% 1.2% 0.5% 0.7% 0.7% 0.6% 0.9% 0.3% 0.2% 25% 0.2% Other 6.9% 7.1% 7.0% 7.0% 6.7% 6.9% CBeebies 20% CBBC BBC News 24 15% BBC Four

10% 19.3% 19.5% 19.3% 20.0% 19.9% 20.4% BBC Three BBC Two 5% BBC One

0% 2003 2004 2005 2006 2007 2008

Source: BARB. Note: ‘Other’ includes BBC Parliament, BBC Choice and BBC Knowledge

Figure 2.75 illustrates ITV has also managed to build its viewing share in multichannel homes over the past five years – and the digital channels have played an important role in offsetting ITV1’s falling share. In 2008, the main channel attracted a 17.2% share of viewer hours in multichannel homes, down by 0.4 percentage points since 2007 and by 2.1 percentage points since 2003. Over the same period the digital-only channels’ collective share rose from 2.9% in 2003 to 5.3% in 2008. The net result was a 0.5 percentage point increase in ITV’s portfolio share, to 22.6%.

Figure 2.75 ITV portfolio share in multichannel homes Audience share 22.1% 21.7% 22.1% 22.0% 22.3% 22.6% 25% 0.3% 0.3% 1.3% 0.5% 1.0% 1.2% 0.7% 0.9% Other 1.6% 1.4% 1.4% 1.6% 20% 1.7% 2.0% 2.0% 2.2% 2.4% CITV 15% ITV4

10% 19.3% 18.9% 18.4% 17.5% 17.6% 17.2% ITV3

5% ITV2

ITV1 0% 2003 2004 2005 2006 2007 2008

Source: BARB. Note: ‘Other’ includes ITV Play, Men & Motors, GMTV2, Granada Breeze, Plus, ITV News. ITV2 and ITV3 include their +1 services

135 The substantial growth in Channel 4’s portfolio share over the past five years can be explained by the expanding range of free-to-view digital-only channels that it offers and by their growing popularity with viewers.

Over the past three years, Channel 4’s channel portfolio has evolved rapidly. This has included the migration of both E4 and Film4 to free-to-view business models, the launch of More4 and the introduction of time-shifted versions of these and the Channel 4 parent channel. The net result has been that Channel 4’s portfolio share of viewing has risen from 3.0% in 2006 to 4.9% in 2008 (Figure 2.76). Even before its relaunch as an advertiser- funded channel, E4 had already managed to attract a loyal base of viewers. In 2004, it secured 1.2% of all viewer hours in multichannel homes, even when it was reach-limited as a result of its subscriber-only status.

Channel 4 itself, however, has not fared as well as its digital-only channels. It lost 0.6 percentage points of viewing share between 2007 and 2008 and accounted for an average of 6.8% of all viewer hours in 2008. Having benefited from a growing share of all viewer hours between 2003 and 2006 (possibly explained by the earlier digital migration of Channel 4’s target audience), it has found its share declining in every year since. The net result is that the main channel’s share in 2008 was broadly comparable to that in 2003 (6.8% in 2008 versus 6.9% five years earlier).

Figure 2.76 Channel 4 portfolio share in multichannel homes Audience share 8.2% 8.6% 9.6% 11.2% 11.2% 11.7% 12% 0.2% 0.3% 0.8% 0.6% 0.8% 0.5% 1.0% 10% 0.9% 4Music 1.9% 1.0% 1.6% 1.8% C4+1 8% 1.2% 1.3% 1.8% More4 Total 6% Film4 Total

8.2% 4% 7.9% 7.4% E4 Total 6.9% 7.3% 6.8% C4 + S4C 2%

0% 2003 2004 2005 2006 2007 2008

Source: BARB

To some extent, the story of Five’s share in multichannel homes has been similar to that of Channel 4. The parent channel saw its share of viewer hours rise between 2003 and 2005, peaking at 5.3%, but its share has fallen back since then (Figure 2.77). In 2008 it stood at 4.7%, down by 0.1 percentage points on 2007 and equal to its 2003 share. At the same time, its two digital-only services, Fiver and Five USA (previously Five Life and Five US respectively), have both managed to build market share since their launch in 2006. In 2008 they secured a 0.6% and 0.7% share of viewing, up by 0.2 and 0.1 percentage points respectively year on year.

136 Figure 2.77 Five’s portfolio share in multichannel homes Audience share 4.7% 5.1% 5.3% 5.1% 5.9% 6% 5.6% 0.7% 0.6% 5% 0.4% 0.6% Five US/ 4% Five USA

3% Five Life/ 5.1% 5.3% Fiver 4.7% 4.9% 4.6% 4.7% 2% Five

0% 2003 2004 2005 2006 2007 2008

Source: BARB. Note Fiver and Five USA include their +1 service shares

BSkyB’s portfolio share of viewing in multichannel homes has fallen consistently for the last five years, contracting by 4.9 percentage points over the period to stand at 6.8% in 2008; year on year its portfolio share fell by 0.8 percentage points (Figure 2.78).

Much of the reduction was driven by the declining popularity of Sky’s Film channels, where share fell by over 50% between 2003 and 2008 to stand at 1.5% in 2008. Sky’s Entertainment channels’ (Sky1, Sky 2 and Sky 3) share of viewing also contracted by nearly 50% over the same period, to stand at 2.1% in 2008. Some of this reduction was probably explained by the disappearance of Sky’s basic-tier channels from the Virgin Media platform for much of 2007 and 2008. It is to be expected that they will recover some ground in 2009 following their reappearance on the platform towards the end of 2008. Sky’s Sports services continued to attract a substantial share of viewing in 2008 (2.6%) – and they have lost a comparatively smaller 1.1 percentage points of share since 2003.

137 Figure 2.78 BSkyB portfolio share in multichannel homes Audience share 11.7% 10.4% 9.2% 8.7% 7.6% 6.8% 12% 1.1% 0.3% Sky Arts/Real Lives 10% 0.6% 0.3% 3.3% 0.1% 0.6% Sky Travel 8% 2.9% 0.5% 0.1% 2.4% 0.5% 0.1% 2.7% 0.5% Sky News 6% 2.2% 3.5% 3.1% 2.1% 2.5% Sky One/Two/Three 4% 2.2% 1.6% 1.5% Sky movie channels 0.0% 2% 3.7% 3.6% 3.4% 3.2% 3.2% 2.6% Sky sports channels 0% 2003 2004 2005 2006 2007 2008

Source: BARB

UKTV’s channel portfolio was again dependent on a smaller number of more popular channels in 2008, breaking the trend between 2004 and 2006 of share fragmentation among a larger number of services (Figure 2.79).

The main driver was Dave, which by 2008 had attracted 1.2% of all viewer hours in multichannel homes, up by 0.5 percentage points since 2007 and treble its share in 2006 (when it was branded as UK G2). At the same time, a number of the channels in UKTV’s portfolio saw their share remain flat or fall slightly. The net result was an overall portfolio share of 3.9% in 2008, broadly in line with the figure twelve months earlier and just 0.2 percentage points lower than the equivalent figure five years ago.

138 Figure 2.79 UKTV portfolio share in multichannel homes Audience share

4.1% 4.2% 4.0% 4.0% 3.9% 3.9% Other 4% 0.2% 0.2% 0.2% 0.3% 0.3% 0.1% 0.2% UKTV G2/Dave 0.3% 0.2% 0.2% 0.4% 0.3% 0.3% 0.7% 0.2% 1.2% UKTV Drama/Alibi 3% 0.5% 0.4% 0.3% 0.2% 0.6% 0.2% UKTV 0.5% 0.1% 1.1% 0.8% 0.2% 0.5% Documentary/Eden 0.6% 2% 0.1% UKTV Food 0.7% 0.6% 0.3% 0.4% 0.4% UKTV 0.4% History/Yesterday 0.3% UKTV Style 1% 1.9% 1.9% 1.6% 1.4% 1.2% 1.1% UKTV Gold/G.O.L.D/Watch 0% 2003 2004 2005 2006 2007 2008

Source: BARB. Note: UKTV portfolio channels have evolved over the past twelve months. In the 2008 figures, new channel names and shares have been matched to old channels. Trends should be interpreted with caution

Growth in Entertainment channels continues

Figure 2.80 illustrates the growing share of channels that fall into the Entertainment genre (as defined by Sky’s electronic programme guide, excluding the five main PSB channels). It reached an average of 21% in 2008, compared to 15% in 2003. Over the same period, the number of channels in the Entertainment category rose by nearly two-thirds, to 39 channels in 2008. But the expanding range of channels in the category did not lead to fragmenting channel shares in this genre category. The most popular channels in the category continued to hold on to much of their share, with the top ten channels in March 2009 accounting for 63% of the genre share, although reduced from the 79% they held in March 2004.

The number of channels in all other genre categories also rose over the period, but their shares of viewing have all been in decline. The Lifestyle and Culture category experienced the steepest fall; 53% over five years (down from 3% in 2003 to 1% in 2008). Music also suffered a steep decline, with share falling by 46% over the period to 2% in 2008.

139 Figure 2.80 Aggregate share of channel genres in multichannel homes Audience share

22% No. of channels 20% 2003 2008 18% Entertainment 24 39

16% Childrens 2013 14% Sport 12 18 12% Movies 14 24 10%

8% Documentaries 10 15 6% Muisc 17 26 4% Lifestyle and 10 18 2% Culture 0% March 2003 March 2004 March 2005 March 2006 March 2007 March 2008 March 2009

Source: BARB. Note: Number of channels doesn’t include +1 services

PSB portfolio channels remain popular with viewers

Figure 2.81 sets out the ten channels in multichannel homes which gained the most share in percentage point terms in 2008, along with the ten channels which lost the most share. Half of the top ten gainers were part of a PSB portfolio, including BBC One, which gained the second-highest absolute share in 2008 (0.5 percentage points), just slightly lower than UKTV’s Dave which accumulated a further 0.6 percentage points in 2008.

Of the channels which lost share in 2008, ITV1 shed the highest absolute amount. This channel, along with BBC Two (which ranked sixth) were the only PSB services among the top ten losers; they included Sky Sports 1, and the UKTV Channels G.O.L.D. and Yesterday.

Figure 2.81 Multichannel audience winners and losers, 2007 to 2008

Dave, 0.55 BBC1, 0.47 Virgin1, 0.34 ITV4, 0.26 ITV3, 0.25 More4, 0.22 Playhouse Disney, 0.19 DMAX , 0.16 Fiver, 0.15 Setanta Sports 1, 0.14 Trouble, -0.1 Boomerang, -0.12 Sky 1, -0.12 Living, -0.13 QVC, -0.14 BBC2, -0.16 Yesterday, -0.17 G.O.L.D., -0.26 Sky Sports 1, -0.33 ITV1, -0.34

-0.6% -0.5% -0.4% -0.3% -0.2% -0.1% 0.0% 0.1% 0.2% 0.3% 0.4% 0.5% 0.6%

Source: BARB. Note: includes channels’ +1 services and shows percentage point change in channel’s share of multichannel audience between 2007 and 2008.

140 Perhaps the most striking feature of the top-twenty channel line-up during 2008 was the degree to which the top ten most-watched channels remained completely unchanged year on year. Besides the five main PSB channels, ITV2, ITV3, Sky Sports 1, CBeebies and E4 continued to occupy the top ten slots in the same positions. There was, however, movement among those channels that ranked in the second half of the top twenty, with only BBC Three holding the same place in 2008 as in 2007.

Reflecting its growing popularity with audiences, Dave emerged as the eleventh most popular channel in multichannel homes in 2008, up by nine places. More4 and ITV4 also rose, by three and four places respectively, between 2007 and 2008 to rank as the thirteenth and seventh most popular channels. .

Figure 2.82 The top channels by share in multichannel homes – 2007 to 2008

Share Rank Share Rank Channel 2008 2008 2007 Channel 2008 2008 2007 BBC One 20.4% 1 1 Dave 1.2% 11 20

ITV1 17.2% 2 2 BBC Three 1.2% 12 12

Channel 4 7.4% 3 3 More 4 1.0% 13 16

BBC Two 7.0% 4 4 Film 4 1.0% 14 15

Five 4.7% 5 5 Sky One 1.0% 15 13

ITV2 2.4% 6 6 G.O.L.D 0.9% 16 11

E4 1.8% 7 7 ITV4 0.9% 17 21

ITV3 1.7% 8 8 Living 0.9% 18 14

Sky Sports 1 1.4% 9 9 BBC News 0.8% 19 17

CBeebies 1.3% 10 10 Disney Channel 0.8% 20 18

Source: BARB Note: includes channels’ +1 services. Channels are highlighted if their position has increased or decreased by three slots or more. Direction of arrow indicates whether a channel has moved up or down the rankings.

Platform and channel demographics

Just 35% of analogue-only adult viewers are now aged 44 or under, compared to 53% of the UK population (down by four percentage points on 2007). It is possible that the analogue television viewing universe is growing older because younger viewers continue to migrate to digital television platforms more rapidly. Perhaps reflecting the popularity of Freeview among older viewers, people over 65 accounted for an increasing proportion of those claiming access to Freeview in 2008, up by three percentage points year on year to 25% in 2008 (compared to 19% of the population). The demographic profiles of satellite and cable viewers remained largely stable over the same period.

In a similar vein, the socio-demographic profile of the analogue-only viewing audience skewed progressively towards the DE demographic during 2008. This segment accounted for 41% of the platform’s total audience (up from 36% in 2007), while making up only 27% of the population. And Freeview’s demography also suggested that among those in the DE category who migrated to digital, DTT was a popular choice. They accounted for 30% of the platform’s viewers in 2008, up by three percentage points in 12 months, and compared to just 27% of the population as a whole.

141 The modest increase in the average hours of viewing per day (from 3.5 hours/day in 2007 to 3.7 hours/day in 2008) for analogue-only homes might also be explained by the progressive ageing of the population of analogue television viewers.

Figure 2.83 Platform demographics by age, social grade and viewing hours, 2008

% platform profile 65+ 45-64 25-44 15-24 DE C2 C1 AB Average Hours per day 100% 5 13% 12% 19% 24% 24% 7 7 7 25% 27% 30% . .6 . . 80% 39% 41% 3 3 3 3 4 28% 32% 29% 18% 20% 18% 60% 28% 19% 3 27% 14% 30% 29% 33% 40% 44% 41% 30% 2 37% 32% 26% 19% 20% 1 25% 22% 28% 25% 16% 16% 15% 15% 15% 20% 0% 0

Source: Ofcom and BARB

Figure 2.84 plots the age and gender audience profile of the largest general Entertainment channels in multichannel homes, calculated relative to the adult TV population average. The majority of Entertainment channels attracted a younger-skewed audience, spread across both female and male groups. But with the exception of Channel 4, the main PSB channels tended to appeal more to older audiences, and all the commercial terrestrial channels were female-skewed, while BBC One was evenly split and BBC Two attracted more men. The only other channels which fell securely into the older-male quadrant were BBC Four, and to a lesser extent ITV4 and BBC HD.

BSkyB’s entertainment channels all sat within the younger male quadrant, alongside channels such as the Comedy Central channels, Virgin 1, DMax, Bravo, Dave and Men & Motors. Channels such as Living TV, E4 and Fiver attracted a younger female audience.

142 Figure 2.84 Age and demographic profile of Entertainment channels in multichannel homes

Male ITV4 Men & Bravo 2 Motors Dave Virgin 1 BBC HD Comedy Central 2 Sky Two Bravo BBC Four Sky One Comedy Sci-Fi DMax Central G.O.L.D BBC Two BBC3 Sky Three Younger Watch Five USA Older More4 MTV R BBC One Channel 4 Five Alibi Challenge Trouble E4 ITV2 ITV1 ITV3 Fiver Living TV Living TV 2 Hallmark

Female

Source: Ofcom and BARB Note: The profile of a channel is calculated relative to the television population in multichannel homes. Includes channels’ +1 services

2.3.8 Consumer attitudes toward television

Older viewers more likely to believe TV content has deteriorated in quality over 2008

Ofcom research found that the majority (53%) of adults believed that TV programmes had neither improved nor deteriorated in quality in the last year (the survey was carried out in April and October 2008); 32% believed that they had deteriorated – or ‘got worse’ - and 13% said that they had improved during the course of the year (Figure 2.85).

The proportion of respondents who believed that content had worsened rose with age, with viewers in the 65+ category being more than twice as likely as those aged 15-24 to believe that programming had deteriorated (46% versus 19%). The reverse was true for those believing that programmes had got better, with 18% of 15-24 year olds expressing this view versus just 7% of over-65s.

143 Figure 2.85 Consumer attitudes towards television programmes over 2008, by age % of respondents

100% 3% 4% 3% 2% 2% 7% 13% 14% 11% 18% Don't know 80%

44% 52% 60% 53% Improved 54% 59% 40% Stayed the same

46% 20% 35% 32% 29% 19% Got worse 0% Total 15-24 year 25-44 year 45-64 year 65+ olds olds olds

Source: Ofcom research, fieldwork carried out by Continental Research, April and October 2008 T50 – Do you feel that over the past year, television programmes have improved, got worse or stayed about the same? Base: All adults aged 15+ (1987) (333 aged 15-24, 732 aged 25-44 ,597 aged 45- 64, 325 aged 65+)

Of those surveyed who believed that programmes had worsened, 62% cited the increased number of repeats as a reason for this, with only minor variations between age groups (Figure 2.86).

Thirty-four per cent stated that there was a lack of variety on TV, with the younger age groups in particular highlighting this as an issue (43% of 15-24 year olds and 41% of 25-44 year olds). A higher proportion of respondents in the older age groups believed that programmes had deteriorated due to the inclusion of more violence (20% of over-65s) and bad language (23% of over-65s) compared to the averages across all age groups (15% and 14%).

144 Figure 2.86 Reasons why TV programme quality deteriorated in 2008 % of respondents All adults 15-24 25-44 45-64 65+ 70% 65%64% 62% 63% 59% 60%

50% 43% 41% 40% 34% 28% 30% 26% 23% 20% 20% 17% 18% 15% 14% 14% 15% 12% 13% 10% 9% 8% 10% 7% 6%

0% More repeats Lack of variety More Violence More bad language Too many reality programmes Source: Ofcom research, fieldwork carried out by Continental Research, April and October 2008. Question – In what ways do you think the television programmes have got worse over the past year? Base: All adults 15+ saying TV has got worse over the past year (634 ) (62 aged 15-24, 210 aged 25- 44 , 212 aged 45-64, 150 aged 65+)

Figure 2.87 illustrates that of those who were able to block access to certain television channels, 71% claimed they had never done so, with men being more likely than women to say they had never used this functionality (77% versus 64%). A higher proportion of women claimed that they used the device to block content every day (15%); over double the figure for male respondents (7%).

Figure 2.87 PIN/password-protected TV, 2008 % of respondents 100% Don't know 80% Never used it 64% 60% 71% 77% Have tried it before Once a month 40% 11% Once a week 9% 20% 4% 4% 8% 4% 4% 3% Everyday 3% 15% 10% 7% 0% Total Male Female

Source: Ofcom research, fieldwork carried out by Continental Research, April and October 2008. Question – How often, if at all, do you use this system? Base: All adults 15+ with a feature which enables them to block access to certain channels (760) (390 Male, 370 Female)

145

The Communications Market 2008

3 Radio

147 Contents

3.1 Key market developments in radio 149 3.1.1 UK radio industry key metrics 149 3.1.2 Digital radio listening 150 3.1.3 Performance of BBC and commercial radio 152 3.1.4 Listening patterns by age group 154 3.1.5 Key policy developments during 2008/09 155 3.2 The radio industry 159 3.2.1 Industry revenues and expenditure 160 3.2.2 Commercial radio groups’ performance and market shares in 2008/09 162 3.2.3 The performance of the BBC’s radio services in 2008/09 168 3.2.4 Radio licences 170 3.2.5 DAB availability and station choice 176 3.2.6 Restricted service licences 178 3.3 The radio listener 181 3.3.1 Radio reach 181 3.3.2 Listening hours 182 3.3.3 Most listened-to radio stations 184 3.3.4 Radio ownership and listening trends 188 3.3.5 The impact of the internet on radio listening 191 3.3.6 Location of listening 193 3.3.7 Satisfaction with radio services 193

148 3.1 Key market developments in radio

3.1.1 UK radio industry key metrics

UK radio industry 2003 2004 2005 2006 2007 2008

Weekly reach of radio (% of population) 90.5% 90.3% 90.0% 89.8% 89.8% 89.5%

Average weekly hours per head 22.1 21.9 21.6 21.2 20.6 20.1

BBC share of listening 52.8% 55.5% 54.5% 54.7% 55.0% 55.7%

Total industry revenue (£m) 1,128 1,158 1,156 1,126 1,175 1,148

Commercial revenue (£m) 543 551 530 512 522 505

BBC expenditure (£m) 585 607 626 614 653 643

Radio share of advertising spend 3.6% 3.5% 3.3% 3.0% 2.9% 2.8%

Number of stations (analogue and DAB) 357 364 372 389 397 389

DAB digital radio take-up (households) 2% 5% 10% 16% 22% 30%

Source: Ofcom technology tracking study, RAJAR (all individuals age 15+), BBC, WARC, radio operators 2008

This section explores developments and trends in the UK radio market. Some of the key findings are:

 In June 2009, the Government’s Digital Britain report was published, recommending the ‘digital migration’ of the majority of radio services in the UK, with a proposed target of 2015. It specified an interim 2013 milestone of 50% of all radio listening to be through a digital platform and targets for national DAB coverage to be comparable to FM and for car manufacturers to be installing DAB sets as standard (page 155).

 By Q1 2009 digital radio platforms attracted just over a fifth (20.1%) of all radio listening hours, up from 17.8% in Q1 2008. The majority (63%) of digital listening was through a DAB digital radio set, and this platform alone accounted for 12.7% of all radio listening. Digital television delivered a further 3.4% and the internet 2.2% (page 150).

 Cumulative sales of DAB digital radio sets passed 9 million by Q1 2009 (up from almost 7 million in Q1 2008). RAJAR estimates that almost a third (32%) of UK adults owned a DAB set by the end of Q1 2009, up by five percentage points on the previous year (page 151).

 A third of adults had listened to the radio online, according to the RAJAR internet and audio services survey carried out in May 2009. This was up from 29% a year earlier and 24% 18 months ago (page 151).

149 3.1.2 Digital radio listening

One fifth of all radio hours now through a digital platform

The increasing take-up of digital media platforms has had a significant effect on how people listen to radio. In addition to DAB, digital radio services can also be received through digital television decoders (where take-up had reached 89% by the end of Q1 2009), and also using the internet (where residential penetration reached 70% in Q1 2009, of which broadband accounted for the majority (65%)).

The result has been that 20.1% of all listener hours in Q1 2009 were delivered through a digital platform, up by 2.3 percentage points in the year. DAB digital radio accounted for most of this digital growth, up by 1.9 percentage points on Q1 2008 to 12.7%. Digital television was the second most commonly-used digital platform, making up a further 3.4% of all listener hours. Listening online took a further 2.2% share of all radio hours, with a small element of “non-defined” digital listening making up the remainder (Figure 3.1).

Figure 3.1 Digital radio’s share of total radio audience, Q1 2009

15 12.7%

10 20.1%

5 3.4% 7.4 2.2% 4 1.8 1.8% 0 All digital DAB DTV Internet Digital unspecified

Source: RAJAR (adult listeners 15+), Q1 2009

One-third of adults now have access to DAB radio at home

Cumulative sales of DAB digital radio sets passed the 9 million mark by Q1 2009, with RAJAR estimating that almost a third of UK households (32%) owned a DAB radio set by March 2009 (Figure 3.2). This grew from only 4% of homes five years ago and was up by 5 percentage points over the last year. DAB sales now account for a quarter of all radios sold, and 62% of all portable radios sold in the year to Q1 2009. Sixteen per cent of adults said they were likely to purchase a DAB set over the coming year according to Ofcom research carried out in Q1 2009. Across the UK, take-up varied by city; it rose as high as 52% in Derby and stood at 47% in Cardiff and 32% in Edinburgh. It was lower in Norwich (24%) and Derry/Londonderry (17%).

150 Figure 3.2 Ownership of DAB set Percentage of adults who claim to own a DAB set / have a DAB set in the home 40%

30%

20% 32% 27% 10% 20% 14% 8% 4% 0% Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009

Source: RAJAR / Ipsos MORI / RSMB Q1 2009

A third of adults have listened to radio via the internet

RAJAR carried out a survey of internet-delivered audio services in May 2009. It revealed that nearly a third (33%) of respondents (adults 15+) now claim to have listened to radio via the internet, (either live or listen-again services). This was up by around four percentage points from a year previously, and up 9 percentage points over the 18 months since October 2007 (Figure 3.3).

Of the 16.9 million people listening online in May 2009, 15.9 million (31% of adults) said they were listening to live radio, with 13.8 million (27%) using listen-again services (i.e. listening to stored archived radio programmes or seven day catch-up content). Seven in ten users of listen-again services said that this was additional to live listening, and half said they now listened to radio programmes which they did not listen to previously.

In addition, 3.9 million people (8%) claimed to have used personalised online radio (POR) services such as Last.fm, with 2.4 million (5%) using these services every week. Around a million adults (2%) in May 2009 claimed to have a WiFi radio set (a stand-alone radio set which connects wirelessly to the internet to provide access to any internet radio service), with just over seven million (14%) claiming to have heard of WiFi radio.

Figure 3.3 Listening to radio via the internet

Per cent of adults 24% 29% 32% 33% Internet users (millions)

20 16.1 16.9 14.5 15 12.0 10

0 Oct 2007 May 2008 Oct 2008 May 2009

Source: RAJAR / Ipsos MORI, ‘Measurement of Internet Delivered Audio Services (MIDAS 4)’, conducted during May 2009, and previously October 2008, May 2008, and October 2007

151 Podcasting also increased; almost 8 million users by May 2009

RAJAR has also found that listening to podcasts was also becoming more widespread, with 7.8 million internet users (equivalent to 15% of adults) having downloaded a podcast by May 2009, up from 6.0 million (12% adults) twelve months earlier. Podcasting was a weekly activity for 4.2 million (8% adults) internet users, up from 3.7 million (7% adults) a year previously (Figure 3.4).

Figure 3.4 Listening to podcasts

Per cent of adults

8% 4% 12% 7% 14% 8% 15% 8%

Have downloaded a podcast Podcast every week 7.8 8 7.2 6.0 6 4.3 4.1 4.2 4 3.7

2 1.9

Internet users (millions) users Internet 0 Oct 2007 May 2008 Oct 2008 May 2009

Source: RAJAR / Ipsos MORI, ‘Measurement of Internet Delivered Audio Services (MIDAS 4)’, conducted during May 2009, and previously October 2008, May 2008, and October 2007

The survey also found that, on average, listeners subscribed to 5.2 podcasts per week, up from 3.6 a year previously, with comedy and music the most-downloaded genres. Three- quarters of respondents claimed that listening to podcasts had not reduced their listening to live radio stations, and over a third (36%) said that they now listened to more radio programmes as a result of podcasting. Around 4.5% of users said that they had paid for a podcast at some time, while a third of respondents said they would consider paying for a podcast that was advert-free. iTunes was the most widely-used podcasting software, used by 70% of users, while 16% said they downloaded directly from a website via their browser. Around three-quarters (76%) had listened via their home PC and 64% using a portable audio/MP3 player.

3.1.3 Performance of BBC and commercial radio

BBC Radio’s share of listening rose again in 2008 to 55.7%

The BBC’s share of total radio listening increased again in 2008, up by 0.7 percentage points (pp) to 55.7%, while commercial radio accounted for 42.2%, with ‘other’ listening (community radio, unmetered listening) making up the remainder. The BBC’s share of hours has risen consistently over the past three years, and was up by 2.9pp from 52.8% in 2003. Over the same period, commercial radio’s listening share fell by 3.0pp to 42.2%, and was down by 0.6 pp on the year (Figure 3.5).

Commensurate with falling listening share, commercial radio revenues were down by around 3.4% to £505m during 2008. The latest operator data suggest that this trend has continued into 2009, as advertisers cut budgets against the backdrop of the wider economic downturn; by Q1 2009 commercial radio revenues had fallen by 11% year on year. The BBC’s

152 expenditure on radio was also down; we estimate spend of £643m in 2008, down by £10m (1.5%) on the previous year.

As falls in the commercial sector were marginally greater than the drop in licence fee spend, the BBC’s share of industry funding rose by 0.4pp to 56.0%, just above its audience share (55.7%). The commercial sector’s share of funding stood at 44.0% in 2008, also ahead of listening share (42.2%).

Figure 3.5 BBC and commercial radio share of listening and funding Share of listening hours / share of radio funding 80%

BBC radio 60% 55.6% 56.0% 53.0% 52.8% 53.5% 54.5% 54.5% share of funding 52.6% 51.9% 52.4% 54.2% 54.7% 55.0% 55.7% BBC radio share of hours 47.0% 48.1% 47.6% 40% 45.8% 45.5% 44.4% 44.0% 45.5% 45.2% 44.6% 43.5% 43.1% Commercial radio share 42.8% 42.2% of funding

20% Commercial radio share of hours 1.9% 2.0% 1.9% 2.0% 2.2% 2.2% 2.1% Other radio hours 0% 2002 2003 2004 2005 2006 2007 2008

Source: Listening data based on RAJAR (Adults 15+). Funding share data based on commercial radio revenues and estimated BBC expenditure on radio for 2008 Note: ‘Other’ radio hours includes including independent stations, local community and RSL services

Radio listening down in 2008; commercial hours fell furthest

Total radio listening fell by 1.7% in 2008, with BBC stations losing 0.5% of hours and commercial radio down 3.2%. Across the industry, only the BBC’s network (nation-wide) stations experienced an increase in listener hours, up by 0.8% year on year, benefitting from the availability of all 11 of its national stations across all digital platforms. By contrast, listening to BBC local radio was down by 6.2%, the largest proportional fall within the radio sector in 2008. Local commercial radio hours also fell over the year (by 2.8%) while the national commercial stations saw their hours fall for the first time in 2008, by 4.5%. This was partly due to share reductions at Absolute Radio’s (formerly Virgin’s) national station, but also because fewer commercial stations are available on the national DAB multiplex (only four were present for most of the year).

153 Figure 3.6 Change in listening hours 2007-2008, by sector

Share of all radio hours: 100% 55.7% 42.2% 46.2% 9.5% 10.9% 31.3% 10% All Radio All BBC All Commercial BBC network radio BBC local / national National commercial Local commercial

5% 0.8% 0% -0.5% -1.7% -5% -3.2% -2.8% -4.5% -6.2% -10%

Percentage change in listeninghours

Source: RAJAR, (all listeners aged 15+). Data based on calendar year 2008 versus 2007

3.1.4 Listening patterns by age group

People aged under twenty-five led the fall in listening hours during 2008

During 2008, the amount of time people spent listening to radio continued to fall across most age groups, with all adult listening down 1.7% to 20.1 hours/week in 2008. According to RAJAR, average listening for all adults aged 15+ stood at 20.1 hours a week over 2008, down by two hours from 22.1 hours five years ago, and down by around half an hour on 2007. By comparison, television viewing was up during 2008, with average viewing at 24.2 hours per week, up from 23.7 the previous year and similar to 24.1 hours five years previously.

The reduction in radio listening hours was more pronounced among younger people, with 15-24s and children’s hours falling by 4% during 2008. Among 25-44 year-olds listening fell by 3%, while over 55s’ hours contracted by 1%. The only age group where hours grew (by 1%) was among listeners aged 45-54.

Figure 3.7 Changes in listening hours, 2008 versus 2007, by age group

Share of all radio hours: 93.4% 6.6% 11.8% 12.7% 17.2% 16.5% 35.1%

All adults 15+ Children 4-14 15-24 25-34 35-44 45-54 55+

2% 1.1%

-1.3% -2% -1.7% -2.8% -2.9% -4% -4.1% -4.0% -6%

Percentage change in listening hours listening in change Percentage Source: RAJAR, data based on calendar years 2007 – 2008

154 3.1.5 Key policy developments during 2008/09

In 2008/09 a number of major initiatives for the future of radio were set out with the aim of creating a unified approach to future radio strategies and technologies and preparing radio for the new digital environment.

The Government’s Digital Britain report proposed digital migration by 2015

This Government report, published in June 2009, set out policy for digital media and communications services in the UK, and contained a number of proposals of relevance to the radio industry:

 The upgrade of all national and large local radio services to digital-only formats (DAB radio), with a proposed date of 2015. Analogue frequencies to be maintained for the provision of local community and other small local commercial services.

 A recommendation that car manufacturers should aim to install DAB radio sets as standard, with a proposed target date of 2013.

 The report set out two main criteria to be fulfilled to initiate digital migration;

1) when 50% of radio listening is via digital platforms; and 2) when national DAB coverage is comparable to FM coverage, and when local DAB reaches 90% of the population and all major roads.

 The Government proposed that these criteria should be met by the end of 2013.

The Government also recommended new legislation to help increase DAB coverage by allowing existing local multiplexes to extend their coverage into areas currently un-served, while also allowing for multiplexes to merge where appropriate, with the possibility of the regional multiplexes consolidating and extending to form a second national multiplex.

Alongside the digital migration proposals, the Digital Britain report also included recommendations to help secure the provision of local content in radio while taking account of the economic factors facing local operators. It asked Ofcom to consider a relaxation in areas of local ownership and location rules, as well as considering a reduction in the ratio of local hours produced in exchange for an enhanced commitment to regular and updated local news bulletins. Many of these changes require new legislation.

The Radio Council formed in April 2009, incorporating public and private sectors

Established in April 2009, The Radio Council comprises industry leaders from the BBC and commercial radio groups (including Global Radio, Bauer Media and GMG), in association with the industry body The Radio Centre. The group was set up to coordinate radio activities and technologies and to develop a unified approach to new services across the public and commercial sectors. The Council outlined three initial cross-sector digital projects including:

 develop an online live radio player – an open platform that streams all live UK radio in one place;

 develop a common user interface and electronic programme guide (EPG) for listeners across all devices – DAB, DTV, online and mobile phones; and

 develop a calendar of exclusive digital-only content for listeners on DAB.

155 Another project is to develop a standardised industry-wide radio recording / catch-up service - Radio Plus, which would operate in a similar way to digital video recorders (DVRs) such as Sky + and Virgin’s V+ services. This would allow users to record radio programmes in advance, using a programme schedule, and listen to them at a later time, with pause and rewind functionality, as well as the ability to store programmes. The chairmanship of The Radio Council is expected to rotate annually between the BBC and its commercial counterparts.

Ofcom consultations on radio:

Ofcom currently has three consultation documents with particular relevance for radio. These are:

1. Broadcasting Code Review (published 15 June 2009) – This consultation, which includes both television and radio, includes proposals for reforming the Broadcasting Code, to reflect changes in society and in the broadcasting and regulatory environment. In particular, it considers replacing Code Section Nine (Sponsorship) and Code Section Ten (Commercial References) with a new Section Nine on Commercial References in Television Programming and a new Section Ten on Commercial References in Radio Programming. The new Section Ten would include three new sets of rules regarding:

 Content-related promotions - proposals to allow a brief offer of further information, or offer for sale, of a product or service that is directly associated with specific content and funded by a third party.

 Venue-sponsored outside broadcasts - proposals to allow the sponsorship of outside broadcasts by the venue or venue owner.

 Sponsored listener competition features - proposals to allow sponsor references to form part of listener competition features.

2. Media Ownership Rules Review (published Friday 31 July) – This consultation forms part of our statutory review of the media ownership rules for the Secretary of State for Culture, Media and Sport. It proposes to recommend, subject to consultation:  To remove the local radio service ownership rules and the local and national radio multiplex ownership rules. Removal would reduce regulation on an industry facing difficult market conditions and may allow stations opportunities to be more viable. New research also shows a majority of consumers are not concerned about single ownership within local commercial radio.

 To liberalise the local cross media ownership rules so that the only restriction is on one organisation owning all three of: a local newspaper (with 50%+ share), a local radio station and Channel 3 licence. This liberalisation will increase the flexibility of local media to respond to market pressures. Consumers still rely on television, radio and press for news, so going further to complete removal of the rules could reduce protections for plurality.

3. Radio – the implication of Digital Britain for localness regulation (published 31 July 2009) – This consultation follows on from the publication of the Government’s Digital Britain final report and consults on how some of the changes it recommends would be implemented if Parliament decides to adopt Digital Britain’s recommendations within a Digital Economy Bill. The proposals being consulted on (many of which require new legislation) include:

156  Allowing regional stations to share all of their programming in return for offering a version of that service on a national DAB multiplex. Also allowing regional DAB multiplexes to merge and expand to form a new national DAB multiplex (subject to spectrum being available). This would facilitate the creation of new national commercial radio stations.

 Allowing stations to co-locate within new defined areas. Stations may also request to share all of their programming within these defined areas and local multiplex operators may request to share all programming across those areas. These proposals are aimed at helping to secure a tier of local stations across the UK, balancing local interests against the need for scale to help viability.

 Preparing for a new tier of ultra-local services, building on the success of community radio but also including small-scale commercial stations.

Community radio continues to develop across the UK

By July 2009, 205 community radio licences had been awarded, with 141 of these already broadcasting at the time of going to press. Ofcom estimates that around 6.5 million adults (or 8.1 million people including children) are now able to receive a community radio station relevant to them, in terms of being either a general audience service for the locality or a more targeted service for a particular interest group. This is equivalent to around 15% of adults being served by each community station. In March 2009 Ofcom published its annual report on the community radio sector, providing insight into the operations of the sector and an overview of revenue streams for community stations. The report found that the largest single source of income was from grants (45%), chiefly from public bodies and local authorities, followed by advertising and sponsorship (20%), while donations added 12% and service level agreements with other organisations a further 11%.

157

3.2 The radio industry

This section examines the UK radio industry, focusing on its financial performance (including commercial revenue and BBC expenditure) and the audience shares of the main players by sector. It includes a review of the main market developments during 2008/09 and a round-up of the licences awarded by Ofcom during 2008/09.

Key points in this section include:

 Total UK radio industry funding stood at £1.15bn in 2008, down by 2.3% on 2007, driven by falling commercial revenues and also by reduced spend by the BBC on radio. We estimate that BBC radio expenditure accounted for around £643m in 2008, down by £10m in 2007, accounting for 56% of all radio income/spend in 2008 (page 160).

 Total commercial radio revenue was down by 3.4% (£17m) at £505m in 2008; it was also down by 7% on the £543m generated in 2003. By Q1 2009 the year-on- year reduction had risen to 11% (page 160).

 Expenditure on radio advertising was down by 13% in 2008, according to the WARC. Radio’s share of display advertising fell to 2.8% down by 0.1 percentage points (pp) since 2007, and down by 0.7pp since 2003. By comparison, TV advertising expenditure was down by 0.3pp to 23.2% in 2008, while internet spend was up on the year, by 3.9 pp to 20.3% of all display advertising (page 161).

 The commercial radio industry experienced ongoing consolidation during the past year with a number of sales and acquisitions among radio groups. UKRD assumed control of The Local Radio Company (TLRC) in March 2009. The Laser Broadcasting group went into administration in Autumn 2008 and its licences were transferred to new owners. CN Group also sold its five Midlands licences to Quidem Midlands Ltd in the year. The largest commercial group, Global Radio, re-branded thirty local stations as Heart as the group outlined plans to focus on developing its main brands (page 163).

 The commercial radio stations’ share of all radio listening stood at 41.6% by Q1 2009, (41.1% Q1 2008), of which local commercial licensees accounted for 31.3% and national commercial stations for 10.2%. The enlarged Global Radio group, (incorporating the former GCap and Chrysalis stations), attracted a share of 16.9% of all radio hours by Q1 2009 (17.0% in Q1 2008), while Bauer Radio group’s market share stood at 10.6% (10.3% Q1 2008). The shares of other leading groups included GMG (4.7%), UTV (2.9%), Absolute (1.2%), and TLRC (0.5%) (page 164).

159 3.2.1 Industry revenues and expenditure

Radio funding down 2.3% to £1,148m in 2008

Ofcom estimates that total radio revenue in 2008 was around £1.15bn, down by 2.3% (£27m) on last year. This compares to £11.2bn of revenue in the TV industry for 2008, up 1.3% in the year. The radio revenue figure comprises all reported commercial radio revenue, together with our estimate of the BBC’s expenditure on its radio services.

BBC spend on radio of £643m in 2008 was down by £10m (1.5%) year on year, although up by £58m (9.9%) on 2003. By comparison, BBC expenditure on TV also dropped, by 1.2% to around £2.6bn in 2008, equivalent to 23% of the total TV industry revenue. BBC expenditure continues to form the largest single source of funding for the radio industry.

Total commercial radio revenues were down in 2008, with income of £505m, falling by £17m (-3.4%) on 2007. Revenues in 2008 were also lower than five years ago; down 7% from £543m in 2003. By Q1 2009 the annual fall in commercial revenue had risen to 11%, as the economic environment continued to exert an influence over advertising budgets.

Of the £505m generated in 2008, national advertising sales accounted for £254m, down by £17m (-6.3%) in the year. Local commercial sales reached £147m, down by £9m (-5.8%) on 2007. Sponsorship bucked this trend, with revenue up by £7m (7.3%) to £103m in 2008. Sponsorship has become a growing component of commercial revenues in recent years, aided by newer digital revenues from websites and other areas such as competition sponsorship (Figure 3.8).

Figure 3.8 UK commercial radio revenue and BBC radio spending £ million

1,200 1128 1158 1156 1126 1175 1148 Total

1,000 BBC expenditure (estimated) 800 653 Total commercial 585 607 626 614 643 600 National 543 551 530 commercial 400 512 522 505 306 286 274 268 271 254 Local commercial 177 200 163 169 153 156 147 Commercial 103 0 75 88 87 91 96 sponsorship 2003 2004 2005 2006 2007 2008

Source: Ofcom / operator data / BBC Notes: BBC expenditure figures are estimated by Ofcom based on figures in the BBC’s annual report; figures in the chart are rounded

Chart-led and Adult Mainstream stations account for two-thirds share of commercial revenue

The largest share of revenue by station format is held by the Chart-led and Adult Mainstream (RAJAR classification) genres, which together accounted for 63% of commercial analogue net broadcasting revenue in 2008. This collective share was similar to 2003 (64%), but Chart-led stations have taken an increasing share within that total. Specialist stations experienced an increase in their share of revenue over the same period, up by three percentage points to account for 20% of revenues (Figure 3.9).

160 Figure 3.9 Commercial net broadcasting: revenue share

100% 1% 3% 6% 6% 1% Ethnic 6% 11% Specialist Music - Other 80% 8% 7% 8% Specialist News/Speech 8% 9% 60% 8% 6% Specialist Music - Youth Orientated 16% 35+/Gold 40% 31% Unknown Adult mainstream and Chat 20% 42% Chart led mainstream 24% Adult mainstream 0% 2008 2003

Source: Ofcom

Radio’s share of advertising expenditure down in 2008

Expenditure on radio advertising was down by 13% in 2008, according to the World Advertising Research Council (WARC), and radio’s share of display advertising fell to 2.8%, down by 0.1 percentage points since 2007 and by 0.7 percentage points since 2003. By comparison, TV advertising expenditure was down by 0.3 percentage points to 23.2% in 2008, while internet spend was up on the year, by 3.9%, to 20.3% of all display advertising.

Looking forward, WARC forecasts that radio advertising spend will fall by 7.7% in 2009, slightly better than the forecast for the wider display sector, with an 8.5% drop forecast for 2009. Expenditure on radio in 2010 was expected to be similar to levels in 2009.

Figure 3.10 UK radio advertising spend and share of display advertising, 2002 - 2008 Revenue £m Share of all advertising

£600m 4% 3.4% 3.5% 3.4% 3.2% 3.5% £500m 3% Radio advertising 2.9% 2.8% 3% expenditure £400m 2.5% £300m 2% £480m £506m £518m £485m £437m £442m 1.5% £200m £391m Radio share of all 1% display advertising £100m 0.5% £0m 0% 2002 2003 2004 2005 2006 2007 2008

Source: The Advertising Forecast, WARC Note: Chart uses year 2000 prices

Commercial radio revenue per listener fell by 3.4% in 2008

By dividing the total revenue generated by the commercial radio sector by the average weekly listener reach, it is possible to derive estimates of revenue per listener. This stood at £16.24 in 2008, down by £0.57 (3.4%) on last year’s figure (£16.81), and down by £0.91 (5.3%) on five years ago – driven by the reductions in advertising expenditure.

161 Figure 3.11 Commercial radio revenue per listener £ per listener 20 £17.15 £17.60 £17.13 £16.59 £16.81 £16.24 15

0 2003 2004 2005 2006 2007 2008

Source: Operator data and RAJAR

3.2.2 Commercial radio groups’ performance and market shares in 2008/09

Commercial radio groups consolidated during 2008/09

The commercial radio industry saw ongoing consolidation during the past year with a number of sales and acquisitions.

 The Laser Broadcasting group went into administration in autumn 2008 with the licences that it previously controlled were either transferred or undergoing a change of control.

 CN Group sold its five Midlands licences to Quidem Midlands Ltd in the year.

 UKRD assumed control of The Local Radio Company (TLRC) in March 2009. The deal was worth £1.24m, with UKRD having previously owned a 13.5% stake in the group. Both UKRD and TLRC had disposed of a number of stations earlier in the financial year, leaving the new, combined group with 21 stations.

 The largest commercial group, Global Radio, re-branded thirty local stations as Heart as the group outlined plans to focus on developing its main brands. This therefore creates a synchronised Heart network across the UK, with many programmes being shared across the stations but also with localised breakfast and drive-time programming.

Four commercial groups own almost half of commercial licences

Over the past two years there have been significant changes in the commercial radio ownership landscape, with three of the top six radio groups changing hands and the two largest commercial groups, Global and Bauer, both now in private hands. Global Radio completed its acquisition of GCap in June 2008, while Bauer bought the Emap radio stations in January 2008. National commercial station Virgin (and its portfolio digital radio stations) was sold by Scottish Media Group (SMG) to the Times of India Group (TIML) in May 2008, it was subsequently re-branded as Absolute Radio.

162 With the acquisition of GCap and the Chrysalis group, Global Radio is the largest group by licences, owning 67 analogue licences (a 22% share). It is followed by the Bauer Radio group with 41 analogue licences (14%). The UKRD Group owns a number of smaller stations and holds 8% of all licences (including TLRC licences), while UTV has a 5% share. Together these four radio groups account for around half (49%) of all UK commercial radio licences (Figure 3.12).

Figure 3.12 Number of commercial analogue stations owned, by group Percentage share of analogue licences (and percentage point change on a year previously) Guardian Media UTV 4% 6-10 stations in 6-10 stations in group 5% (no change) group (- 1%) 2-5 stations in group UKRD / TLRC 18% 8% (+ 3%) Independent (- 3%) Global Radio 2-5 stations in group Bauer Radio 11% Bauer Radio 14% ( + 4%) (no change) UKRD / TLRC UTV Global Radio Independent Guardian Media 22% 18% (+ 4%) (- 3%)

Source: Ofcom, July 2009

Commercial listening hours: mixed fortunes for radio groups

Within the commercial radio sector, three of the top five groups saw their market share (as measured by share of listener hours) decline during 2008. The result was that the smaller groups (combined under ‘Other’ in the chart below) share rose by 1.6 percentage points (pp) to 12.8% in 2008.

The largest commercial group, by listening share is Global Radio. In 2008 its commercial listening share continued to fall, down by 2.1pp to 40.0% and by 9.2pp from 49.2% of hours five years previously. This was partly due to some station disposals during the year, and Global remains the largest radio group by share within the commercial sector. Absolute Radio’s share of hours fell by 0.6pp to 3.2%, which coincided with its re-branding from Virgin Radio. The UTV radio group’s hours also fell in 2008, down 0.4pp to 6.8%.

Among the other larger radio groups, market shares rose. Bauer Radio stations accounted for over a quarter of commercial listening (25.8%) in 2008, up by 1.2pp year-on-year; GMG’s listening share was also up, by 0.3pp to 11.4%.

163 Figure 3.13 Distribution of listening share among commercial radio licensees Percentage share of commercial listening hours

50% 49.2% 46.9% 45.7% Global Radio (former 43.3% 42.1% GCap / Chrysalis) 40.0% 40% Bauer (former Emap)

30% 24.5% 25.1% 23.7% Other 23.3% 24.6% 25.8% 13.7% 12.8% 20% 14.0% 11.2% GMG 11.5% 13.0% 8.6% 11.1% 11.4% 6.6% 7.4% 6.6% 6.9% 10% 4.6% 4.8% 5.8% 7.2% 6.8% UTV

3.8% 3.8% 0% 3.6% 3.6% 3.7% 3.2% Absolute Radio 2003 2004 2005 2006 2007 2008 (former Virgin Radio)

Source: RAJAR, (adults 15+) Note: The portfolio of stations for the major radio groups has changed over the past five years following a combination of mergers, new licence awards and station sales – these figures should therefore be treated as indicative. In particular, the historical figures for Global Radio contain the previous listening hours for GCap (formerly GWR and Capital), as well as the share of Chrysalis stations prior to the take over and merger into Global Radio in June 2008. Bauer Radio formerly Emap as at January 2008, and Absolute Radio formerly Virgin / SMG as at May 2008

The combined commercial radio stations’ share of all radio listening stood at 41.6% by Q1 2009, (41.1% Q1 2008), of which local commercial licensees accounted for 31.3% and national commercial stations a further 10.2%. The enlarged Global Radio group, (incorporating the former GCap and Chrysalis stations) took 16.9% of all hours by Q1 2009 (17.0% in Q1 2008), while Bauer Radio group’s share stood at 10.6% (10.3% Q1 2008). The shares of other leading groups included GMG (4.7%), UTV (2.9%), Absolute (1.2%), and TLRC (0.5%).

However, more than half of all listening in 2008 was to BBC Radio services. Its share reached 56.3% by Q1 2009, (56.8% Q1 2008), of which BBC network radio accounted for 47.0% with BBC local/nations radio generating the remaining 9.4%.

Figure 3.14 Share of all radio listening hours, Q1 2009 Percentage of listening hours

TLRC, 0.5% Absolute, 1.3% Other, 6.8% UTV, 2.9% BBC network GMG, 4.7% BBC network, 47.0% BBC local / nations Global Radio Bauer Radio, 10.6% Bauer Radio GMG UTV Absolute TLRC Global Radio, 16.9% Other

BBC local / nations, 9.4% Source: RAJAR, (adults 15+), Q1 2009

164 Commercial groups’ weekly audience reach

The collective reach of the commercial radio groups is substantial. The largest player, Global Radio, attracted a weekly audience of over 18.5 million adults to its network of UK radio stations, equivalent to almost 37% of the UK adult population. However, this figure was lower than in 2007, partly as a result of the GCap and Chrysalis audience coming together under a single organisational umbrella, removing overlap, but also as a result of station disposals over the year.

The next largest group, Bauer Radio, attracted a weekly audience of around 12.4 million adults during Q1 2009, almost a quarter of the UK adult population (24.4%, up 0.8 percentage points year on year). Of the other commercial groups, GMG’s stations drew an audience of over 5 million a week, with UTV approaching 3.7 million and Absolute Radio (formerly Virgin Radio) almost 1.9 million, while The Local Radio Company’s network of stations secured around 700,000 adult listeners a week in Q1 2009.

Figure 3.15 Commercial radio: weekly audience reach, Q1 2009 Weekly UK audience reach 36.5% 24.4% 10.1% 7.2% 3.7% 1.3% Annual change - 5.1% + 0.8% + 0.6% - 0.2% - 1.7% - 0.5% in reach

15,000 40% 35%

30% 10,000 18,529 25% 20%

12,397 15% 5,000 10% 5,149 3,660 680 5% 1,878 0 0% Global Bauer GMG UTV Absolute TLRC

Weekly reach (thousands) reach Weekly Q1 2009 Source: RAJAR Q1 2009, (adults 15+) Note: GCap now Global Radio, as at June 2008, data may not be comparable year on year

The three nationwide commercial stations, available on FM or AM, each saw their audiences fall in the twelve months to Q1 2009.

Classic FM attracted the largest audience in Q1 2009, with over 5.4 million adult listeners per week, equivalent to 10.7% of UK adults, but down from 11.2% a year previously. The station held a 3.7% share of all radio listening in Q1 2009, stable on a year ago. TalkSPORT attracted 2.4 million listeners each week, almost one in twenty UK adults (4.8%), down only slightly from 4.9% in Q1 2008. Its share of listening hours was down by 0.1 percentage points, to 1.8%.

Absolute Radio’s reach fell furthest during 2008 - losing 1.6 percentage points to reach 3.3% of UK adults by Q1 2009. The station also lost 0.2 percentage points of listening share over the year, down to 1.2% in Q1 2008.

165 Figure 3.16 National commercial stations: reach and share, Q1 2009

Weekly UK audience reach 10.7% 4.8% 3.3%

Annual change -0.5pp -0.1pp -1.6pp in weekly reach

6000 3.7% share of hours

4000

5,414 1.8% share of hours 1.2% share of hours 2000 2,416 1,693 0

Weekly reach Q1 2009 (thousands) 2009 Q1 reach Weekly Classic FM talkSPORT Absolute Radio

Source: RAJAR Q1 2009, (all listeners 15+)

166 The commercial radio groups

The map below illustrates the location of the UK’s local commercial analogue stations.

Figure 3.17 Analogue commercial radio stations, with population served

Absolute R Station size Classic FM National TalkSport Regional SIBC Local FM >250,000 pop. Local FM <250,000 pop. Isles AM

Lochbroom Station owners

Two Lochs Waves Global Radio Bauer Radio Moray Firth NECR Cuillin Guardian Media Group Northsound 1 Northsound 2 UKRD Original Lincs FM UTV Nevis Heartland RNA Orion Media Tay FM, Wave 102 Murfin Media Perth FM Tay AM Kent Messenger Group Oban Central Scotland CN Group Kingdom Central Galaxy Tindle Radio Your Smooth, Clyde 1 Real Your Clyde 2 South West Radio Rock Litt Radio Forth 1,Forth 2 L107 Quidem Borders MNA Argyll West FM Town & Country Broadcasting West Sound Metro Stockvale Magic North East Real TIML South West Sound Galaxy Media Sound Holdings Sun CFM Smooth Other Q97.2 Durham TFM,Magic Q102.9 Seven FM Alpha CFM Single licence with two stations Downtown Lakeland Q101.2 Cool Minster Northallerton City Beat Fresh The Bay Yorkshire Coast Six FM U105 Stray Yorkshire Coast Central Pulse,Gold, Minster Yorkshire North West Wave 2BR Sunrise Aire Five FM Bee Galaxy Real Rock,Magic Rev’n Magic Ridings Real Smooth Dune Tower Pennine Viking,KCFM, Magic RCity,CityTalk Asian Sd. Trax Compass E Midlands Manchester Wish Manchester Dearne Rother Juice,Magic Hallam, Magic Heart Key 103 N & Mid Wales Trax Heart Heart High Peak Galaxy Imagine Lincs Smooth Real Wire Silk Peak Xfm Silk Heart Dee Mansfield Rock Radio Heart Signal1 Trent North Norfolk Magic Gold Signal2 Ram Gold Gold Beacon, KLFM Oak The Beach Severn Gold,Wolf Rutland Lite Birmingham W Midlands Touch Leicester Sd Heart Sabras Gold Heart, Gold BRMB Maldwyn Severn B’ham Smooth Telford Oak Connect Norwich Gold Star Heart Ceredigion Rugby Heart Galaxy Sunshine Wyre Touch Heart Radio XL Kerrang Gold Town Wyvern Mercia, Gold Heart Gold Sunshine Touch Heart Touch Heart Heart Gold Gold Heart Carmarthenshire Heart Banbury Sound Mix96 Ten 17 Sunshine HertBeat Pembrokeshire Star Heart,Jack Dream Scarlet Chelmsford East Note: stations may cover different sized 107.9 Mercury LGR Southend areas, even though based in the same South Wales Heart LTR Kiss The Wave Star Heart town. As a result, stations based in the Red Dragon Gold,Brunel Swansea Sound Heart Time Choice Gold same town may have different Real Reading, Heart Time Swansea Bay Gold Jackie Heart, Gold proposed localness requirements. Nation Gold Gold Bridge Original County Sound KMFM KMFM Star Kick Eagle Bath Mercury KMFM KMFM Severn Estuary Quay Kestrel Delta Quay Andover Gold KMFM KMFM KMFM Kiss 3TR Spire Play Heart Heart Galaxy Bright Arrow Heart MidWest Splash MidWest Gold Sovereign Heart Heart Gold Play Exeter FM Quay Spirit Heart,Gold Fire Isle of Wight Juice Wessex Heart Palm Pirate Gold Solent London-wide Stations R Plymouth Heart Atlantic Wave Absolute R Smooth Sunrise The Coast Capital 95.8 Kiss 100 Kismat

Channel Heart 106.2 Magic 105.4 Club Asia Islands LBC 97.3 LBC News 1152 Spectrum XFM Gold Premier

Source: Ofcom, July 2009 Note: Stations may cover differently sized areas, even when based in the same town. Please note, at time of going to press, the sale of eight Global stations to Orion and the Sunshine sale had not formally completed.

167 3.2.3 The performance of the BBC’s radio services in 2008/09

Around 10 million people listened to BBC radio services via digital platforms on a weekly basis in 2008/09. The number of BBC podcasts downloaded averaged 7.6 million per month in 2008/09, while its radio services were integrated into the BBC’s iPlayer.

BBC network radio share increases with Radio 4 leading the growth

The BBC national radio services available on analogue and digital platforms throughout the UK attracted a 46.2% share of all radio listening hours over 2008, an increase of 1.2 percentage points on 2007 and up 4.4 percentage points in five years. BBC Radio 2 remained the leading radio station, with a 15.8% share over 2008, up 0.1 percentage points; Radio 1 fell by 0.2 percentage points to 10.1%, while Radio 4 gained the most share, up by 0.6 percentage points to 12.4%. However, the listening share of the BBC’s local and nations’ stations fell, down 0.7 percentage points to 9.3%, and down 1.6 percentage points on five years ago (Figure 3.18). Listening to the six BBC digital stations available nationally on the BBC’s DAB network has increased over the past year, with these stations accounting for a 2.3% share of all hours by Q1 2009.

Figure 3.18 BBC radio audience share, 2003-2008 Listening hours (%)

20% 16.0% 16.4% BBC Radio 2 16.0% 15.8% 15.7% 15.8% BBC Radio 4 15% 11.5% 11.8% 11.1% 11.8% 11.5% 12.4% 10.9% 11.0% 11.1% 10.4% 10.3% BBC Local / 10.1% Nations 10% 8.2% 9.2% 7.7% 9.7% 10.0% 9.3% BBC Radio 1 4.5% 4.6% 4.8% 5% 4.4% 4.3% 4.2% BBC Radio 5 Live 1.4% 1.3% 1.2% 1.4% 1.2% 1.3% BBC Radio 3 0% 2003 2004 2005 2006 2007 2008

Source: RAJAR, (adults 15+)

Over two-thirds (67%) of adults listen to the BBC every week

In Q1 2009, BBC radio reached 33.8 million or 67% of UK adults a week (down from 68% in Q1 2008). By comparison, BBC television reaches around 85% of the population (48 million people) on a weekly basis. As with most radio audiences, BBC radio’s average reach peaks at breakfast time and falls steadily during the course of the day; around 8.3 million listeners tune in to a BBC station during the breakfast peak, falling to 5.8 million by mid-morning, 4.7 million during the drive-time slot and 1.4 million overnight.

168 Figure 3.19 All BBC radio listening across the day (weekday)

Change yr on yr - 0.1 -0.3 -0.3 -0.2 +0.1 0.0

10 8.3 8 5.8 6 4.6 4.7 4 2.0 2 1.4

Listening audience (millions) audience Listening 0 Breakfast Mid Afternoon PM drive Evening Overnight peak morning

Source: RAJAR Q1 2009, (all listeners 4+)

Weekly percentage reach of BBC stations: Radio 2 has largest audience

BBC Radio 2 still enjoys the highest reach of any UK radio station, with over a quarter (27%) of adult listeners (13.5 million) tuning in every week in Q1 2009. This was followed by Radio 1 which reached 11 million or just over a fifth (22%) of adults. The Chris Moyles breakfast show on Radio 1 reached 7.7 million listeners a week in Q1 2009, closing on Terry Wogan’s morning show on Radio 2 which averaged 7.8 million listeners. Radio 4 recorded its highest weekly reach for six years with one in five adults (20%) or 10.0 million weekly, with 6.7 million listeners tuning into the breakfast time Today programme. The BBC local/nations’ stations had a similar reach, at almost one in five (19%), with 9.6 million weekly listeners).

Figure 3.20 Weekly reach of BBC stations, Q1 2009 Average weekly listening audience (% UK adults)

BBC Radio 2 27% BBC Radio 1 22% BBC Radio 4 20% BBC Local/Nat 19% BBC Radio 5 Live 12% BBC Radio 3 4% BBC World Service 3% BBC 7 2% 5 Live Sports Extra 1% 1Xtra from the BBC 1% BBC Asian 1% BBC 6 Music 1% Source: RAJAR Q1 2009, adults 15+

Music makes up half of all BBC network hours

Music accounted for over half (51.6%) of all hours broadcast by BBC network radio in 2008/09; this ratio was stable on last year. The next largest content category was News and Weather, which accounted for 15.4% of broadcast hours. Entertainment had an 8.2% share, up from 5.3% the previous year, followed by Drama (5.8%), Sport (5.6%), and Current Affairs (3.5%). Just over 12% of BBC eligible radio hours were independently produced in 2008/09, ahead of its 10% target.

169 Figure 3.21 BBC network radio broadcast hours, by genre: 2008/09 Share of output (%) 60% 51.6%

40%

20% 15.4%

8.2% 5.8% 5.6% 3.2% 2.7% 1.9% 1.4% 1.1% 3.1% 0% Music News / Entertainment Drama Sport Current Factual Children's Religion Arts Other weather affairs Source: BBC Annual Report and Accounts 2008/2009

BBC expenditure by station: BBC Asian Network had highest cost per listener hour in 2008/09

The 2008/09 BBC financial statements show that 17% of the licence fee was spent on radio services. Expenditure of £588m was directly attributable to radio services. Within this figure, £463m was spent on content, £41m on distribution and £85m on infrastructure. In addition to these, a further £10.3m was attributed to DAB digital radio. Analysing services on a cost-per- listener-hour basis shows that national stations, along with specialist music and ethnic stations often cost more owing to their comparatively smaller target audiences. In 2008/09 the national stations in Scotland and Wales incurred the highest cost per listener hour. BBC Radio nan Gàidheal costing around 18 pence per listener hour in 2008/09, with BBC radio Cymru costing 11.5 pence per listener hour.

Figure 3.22 BBC radio stations: cost per listener hour of programmes, 2008/09 Cost (pence) per listener hour BBC Radio nan Gàidheal 18.2 BBC Radio Cymru 11.5 BBC Radio Scotland 7.1 BBC Radio Asian Network 6.9 BBC Radio 3 6.3 BBC Radio Wales 5.0 BBC 1 Xtra 4.5 BBC Radio Uslter / Foyle 4.4 BBC Radio 6 Music 3.4 BBC English Local Radio 2.9 BBC Radio 5 Live Sports 2.6 BBC Radio 5 Live 2.3 BBC Radio 7 2.0 BBC Radio 4 1.3 BBC Radio 1 0.6 BBC Radio 2 0.5 Source: BBC Annual Report and Accounts 2008/2009

3.2.4 Radio licences

By July 2009 just under 400 radio stations were broadcasting in the UK on AM, FM or digital audio broadcasting (DAB) platforms (including local, regional and national services, but excluding community radio). The station line-up changed during the year with some previously-awarded licences going live during the year and a number of stations ceasing to broadcast. Several new digital stations also launched during 2009, including three national commercial digital stations (BFBS, Amazing Radio, and Fun Kids).

170 Figure 3.23 UK radio stations broadcasting on analogue and DAB digital radio (excluding community radio), July 2009

Type of station AM FM Total DAB Analogue or analogue 1 DAB stations 2

Local commercial 56 241 297 166 325

UK-wide commercial 2 1 3 7* 7

BBC UK-wide networks 1 4 5 11 11

BBC local and nations 36 46 46 32 46

TOTAL 95 292 351 216 389

1In total there are 351individual analogue services as 36 simulcast over both AM/FM wavebands. 2Of the 351 analogue stations and 220 DAB stations, there are 389 unique stations, as 38 stations are digital-only brands *The existing Digital One national DAB radio multiplex does not offer coverage of Northern Ireland, where Bauer operate the local multiplex

In addition to services on AM, FM and DAB, over 85 stations were broadcasting on digital satellite in July 2009, 24 were available on Freeview and 35 on cable. Many of these are simulcasts of AM/FM/DAB services.

Two local commercial FM licence awards in 2008

Ofcom awarded 36 local commercial FM licences across the UK over the three-year period 2004-2007. Two further licences were awarded in 2008:

 a new local commercial FM licence for Plymouth was awarded in July 2008 to Radio Plymouth Ltd.

 a new FM local commercial licence for North and Mid Wales was awarded to Real Radio, owned by GMG. The station will cover up to 600,000 people and will also link some programming with the Real Radio service in South Wales, thereby creating a pan-Wales service.

171 Figure 3.24 Number of analogue radio station licences awarded Number of operators

BBC local / 400 364 369 371 342 46 nations 315 322 326 296 302 309 5 280 300 259 3 BBC national 226 231

200 National 310 315 317 commercial 272 288 242 248 255 261 268 100 205 226 172 177 Local and regional commercial 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Ofcom Note: Chart does not include community radio stations

Community stations serving more local communities, with 141 now on air

Community radio licences are awarded to small-scale operators working on a not-for-profit basis to serve local areas or particular communities.

By July 2009, 205 community radio licences had been awarded across the UK, with 141 of the stations already broadcasting at the time of writing. Ofcom estimates that around 6.5 million adults, or 15% of the total population, can now receive a community radio station

Financial information provided by a cross-section of community stations reveals that their main source of income in 2007/08 came from grants, accounting for 45% of all funds. These included awards from the community radio fund (administered by Ofcom on behalf of the DCMS) and from other central Government bodies such as the Arts Council or the Ministry of Defence (in the case of some military-based stations). Local authorities were also an important source of funding, as were the funding bodies supported from the National Lottery. Revenue from advertising and sponsorship made up 20% of income, donations an additional 12% and service level agreements (SLAs) a further 11%. SLAs involve the stations broadcasting output of social benefit on behalf of other organisations in return for funding (Figure 3.25). Many community stations rely on volunteer staff to reduce the costs of providing services.

172 Figure 3.25 Community radio income, by source Community radio stations’ income 2007/08

Fundraising and events Other 2% 7% Education and training 3% Service contracts / SLAs 11% Grants 45%

Donations 12%

Advertising and sponsorship 20%

Source: Ofcom, community radio station revenues 2007/08

Of the 205 licences awarded by July 2009, 161 were in England, 20 in Scotland, 14 in Northern Ireland and 10 in Wales. One hundred and forty-one stations were on air, serving a wide cross-section of local communities across the UK. Figure 3.26 shows that the majority of community stations are concentrated in highly-populated areas; a key attribute of these stations is their ability to provide tailored services for a particular ethnic or cultural group.

173 Figure 3.26 Location of the UK’s community radio stations

The Superstation

Ness FM Licensing Round 12 Speysound shmuFM FM on-air FM not yet on-air Mearns FM AM on-air AM not yet on-air Celtic Music AM Jubilee 1 Dunoon CR Sunny Govan Insight R Not yet considered Leith FM Awaz Revival R Edinburgh Garrison FM Black Diamond Bute FM Pulse FM

3TFM Brick FM

Lionheart R

Spice FM Alive R NE1 FM Spark FM Bishop FM Drive 105 R Hartlepool R Teesdale Cross Rhythms Aldergrove & Antrim FM Drystone R Community Voice Holywood FM R Failte Catterick Garrison FM Feile FM XLFM Diversity BFBS Lisburn Blast FM Indigo FM Vibe FM Lisburn City R Oldham CR Down FM Pendle CR Shine FM Ballykinler FM Vixen JCom Seaside R Iur BCB Tempo Preston FM West Hull CR Leicester Crescent Asian Fever Phoenix Takeover Radio Chorley Branch FM FM Demon FM Greater Manchester & N Cheshire KCC Live EAVA FM All FM – South central & East Manchester Penistone TMCR 7 Waves Redroad FM Kohinoor FM Bolton FM Tudno FM Burngreave CR R Lindum North Manchester FM Sheffield Live Takeover Siren FM Oldham CR Point FM Halton FM Flame CCR Boundary Sd Peace FM – Hulme Cheshire FM Moorlands Amber Sd Erewash Sd R Dawn Pure R – Stockport Canalside Gravity FM Calon FM R Faza Rossendale Radio Cross Rhythms R Ikhlas Kemet R Tulip R Salford CR Hermitage FM Tameside CR Wayland The Eye Wythenshawe FM TCR Future R Gaydio – Manchester The Hillz Unity Radio – central Manchester Huntingdon CR Zeta Blyth Valley Corby R R W Suffolk The ‘Bridge Cross Rhythms HFM Biggles FM Inspiration FM Youthcomm R Into Beats Ipswich CR Diverse FM 209 Radio CAM Birmingham & Black Country Forest of Dean CR R LaB Felixstowe Gloucester FM Ambur Radio – Walsall Inspire R Colchester Garrison Leisure FM Big City R - Aston BRFM Stroud FM Brill Oldies R Verulam OX4 FM Flame Saint FM New Style R - Birmingham Awaz Afan FM GTFM Swindon 105.5 Raaj FM – Sandwell Marlowe FM 1 Phoenix FM SACDA Radio – Sandwell Bristol C FM The Vibe Asian 2 6 Switch Radio – Sandwell R Tircoed R Cardiff Greater London Ummah Star 3 Unity FM - Birmingham Bro R 7 BRFM UJIMA R Somer Valley FM 4 WCR - Wolverhampton 8 SFM Academy FM Glastonbury FM BGWS 5 Suzy Castledown R Aldershot Redstone AHBS CSR Meridian Salisbury PlainThe VoiceCube FM Garrison Academy FM 10Radio Garrison FM Skyline CR Uckfield FM Unity 101 WVCR Rye FM Express FM Forest FM CCR R Reverb Greater London Aspire FM The Park Angel R Phonic FM Seahaven FM Desi R– Southall Hope FM Havant The Bay Hayes FM - Hayes Angel R IOW On FM – Hammersmith Soundart R Bang – Stonebridge & Harlesden Cross Rhythms Plymouth Link FM – Havering R St Austell Bay London surrounds NuSound R – Newham The Source 1 Panjabi Awaz 5 Kane FM Resonance FM – C London Radio Scilly Insanity R Gateway FM R Umma – Newham 2 6 Voice of Africa - Newham Channel 3 R Wey 7 Safe R Westside CR – Southall Islands 4 WCR 8 R Sunlight

Source: Ofcom, June 2009

174 Eighteen community radio stations awarded in 2009

In 2009, a further 18 community radio licences were awarded for services in England. The most recent round of awards, in June 2009, was for stations in East and South East England. The closing date for applications for licences in Greater London and other areas within the M25 is set for 15 September 2009. These will be the final awards of the current round. Over the past year, new stations have been licensed to serve communities in areas including Coventry, Northampton, Manchester, Bury St Edmunds, Felixstowe, Norwich, Cambridge, Essex, Biggleswade, Luton, Huntingdon, Ashford, Ramsgate, Gillingham and Folkestone (Figure 3.27). Figure 3.27 Community radio licence awards in 2008/09

Community station Location Award date

Hermitage FM Coalville, Ibstock and Ashby-de-la-Zouch July 2008 Cross Rhythms Coventry July 2008 The Hillz Radio Coventry July 2008 Inspiration FM Northampton July 2008 Corby Radio Corby, Northamptonshire Sept 2008 Gaydio Manchester Nov 2008 Unity Radio Manchester Nov 2008 Blyth Valley Radio Southwold Feb 2009 Radio West Suffolk Bury St Edmunds Feb 2009 Felixstowe Radio Felixstowe Feb 2009 Zeta 105.3 Forest Heath Feb 2009 Future Radio Norwich March 2009 CAM Cambridge March 2009 Wayland Radio Swaffham and Watton, Norfolk March 2009 Leisure FM East Braintree, Essex March 2009 Biggles FM Biggleswade, Sandy and Potton April 2009 Radio LaB Luton April 2009 Inspire FM Luton April 2009 HCR FM Huntingdon May 2009 Intobeats Bedford May 2009 AHBS Community Radio Ashford, Kent May 2009 Academy FM Thanet Ramsgate, Thanet June 2009 Academy FM Folkestone Folkestone June 2009 Radio Sunlight Gillingham June 2009 Rye FM Rye, East Sussex June 2009 Source: Ofcom

175 Towards the end of 2009, Ofcom will consider whether to conduct a third round of community radio licensing, and if so, how and when to do this. This process could be largely influenced by the availability (or lack) of suitable FM frequencies in many parts of the UK, notably in and around major conurbations.

3.2.5 DAB availability and station choice

Digital radio availability increasing

The majority of UK households are now covered by one or more digital platforms that carry radio services. Broadband internet is available to over 99% of UK homes; digital television is also widely available – satellite covers approximately 98% of homes while DTT extends to 73%; digital cable is available to 49% of homes. The DAB digital radio footprint has expanded in recent years, following the installation of further multiplexes and transmitters. By summer 2008, approximately 90% of the UK population was covered by at least one DAB multiplex, with most areas covered by three or more.

BBC DAB coverage developments

The BBC is still expanding its national DAB digital radio network. New transmitters installed in England over 2009 were located at Berkshire, Suffolk, Leeds, Norfolk (two sites) and Kent.

In Wales BBC DAB services are broadcast from eight sites, with coverage reaching an estimated 68% of households. The BBC is planning to roll out 14 additional transmitter sites in Wales by January 2010, with a further 11 transmitters scheduled for roll-out during 2010/11.

In Scotland a further transmitter was installed by the BBC and Digital One at Braid Hills in Edinburgh in March 2009. Over the coming year there are plans for additional transmitters at a number of sites in Scotland, but a new transmitter for Dumfries & Galloway has been delayed.

In Northern Ireland, the BBC national multiplex was extended in April 2009, with a new transmitter installed at Armagh, adding coverage for an estimated 80,000 people, improving reception for around 200,000 more in the area. The other four transmitter sites in Northern Ireland are at Divis, Brougher Mountain, Limavady and Sheriff’s Mountain in Londonderry/Derry. DAB coverage in Northern Ireland is estimated at around 87% of the population.

Commercial DAB coverage developments

Digital One DAB digital radio network

The Digital One national multiplex is now fully owned by Arqiva, after it agreed to purchase Global Radio’s 63% share in April 2009. As part of the deal Arqiva also took ownership of some of Global’s shareholdings in local radio multiplex operating companies.

Digital One was awarded the first national commercial multiplex licence for DAB digital radio in 1998 and began broadcasting in November 1999 under a 12-year licence, for which it is entitled to apply for a 12-year renewal.

The national commercial network operated by Digital One covers over 90% of the UK population with a network of over 130 transmitters. Coverage expanded with a new transmitter in Taunton in April 2009, bringing new or improved coverage to over 148,000

176 people in the surrounding area. In Wales, the Digital One multiplex, currently covers around 67% of households, and is broadcast from nine sites across the country.

DAB stations availability

Seven DAB stations are currently available on Digital One’s national commercial multiplex: Classic FM, Virgin Radio, talkSPORT, Planet Rock, BFBS (British Forces Broadcasting Service), Amazing Radio, and Fun Kids; the last 3 stations were added over the past year.

A further 11 national DAB stations are available on the BBC’s multiplex; the five UK-wide BBC stations, (BBC Radio 1,2,3,4 and 5 Live) plus six digital-only stations (1Xtra, 6 Music, BBC7, Five Live Extra, World Service and the Asian Network). Figure 3.28 illustrates the availability national DAB services by nation/region, along with the typical number of local stations.

 Listeners in Northern Ireland can access up to 23 DAB stations, including the 11 national BBC stations plus BBC Radio Ulster / Foyle, four national commercial stations (Classic FM, talkSPORT, BFBS and Amazing Radio), and six local commercial stations.

 In Scotland, listeners in Glasgow and Edinburgh have the greatest DAB choice, 35 and 34 respectively - including the 18 national BBC and commercial services, plus BBC Radio Scotland, BBC nan Gaidheal, and 15-16 commercial stations available through local or regional multiplexes. Listeners in Ayrshire have access to around 25 DAB stations, while Aberdeen has 26, Dundee and Perth 24, and Inverness 23.

 In Wales, people living in the larger conurbations of Cardiff, Swansea, and Newport can access up to 34 DAB stations including the 18 national services, along with BBC Radio Wales / BBC Radio Cymru, and an additional 19 services available through the local and regional multiplexes. People in the North, Mid and West areas currently have access to the 18 UK services.

 In England, the choice of DAB stations ranges from 59 in London to 25 in areas such as Plymouth and Cornwall. Larger cities including Birmingham, Liverpool and Manchester have access to around 39 or 40 DAB services, including the 18 national stations. Medium-sized cities such as Leicester, Nottingham, and Stoke have access to between 26-27 DAB stations.

177 Figure 3.28 Availability of DAB stations, by area

60 12 50 12 7 12 40 13 12 7 7 12 12 12 30 7 7 13 12 12 7 77 20 40 7 7 12 33 13 31 28 7 27 7 10 20 18 19 19 16 12 4 8 6 0 London West YorkshireScotland North Central Wales North West East East South Northern Midlands West Southern East England England Midlands West Ireland England Source: Ofcom

Note: This chart shows the maximum number of stations available in each area; local variations along with reception issues mean that listeners may not be able to access all of these.

3.2.6 Restricted service licences

Short–term restricted service licences (RSLs)

Short-term restricted service licences (S-RSLs) are issued for temporary local radio stations which usually serve a very localised coverage area, such as an education campus, a sports event, or a music or religious festival site. These licences are also used for temporary trials of community stations, sometimes to gauge interest before applying for a five-year community licence. The popularity of S-RSLs is high, with the number of licences issued each year typically ranging from 400 to 500. Ofcom received 504 applications for S-RSLs in 2008 and issued 438 licences. This was up on last year’s total of 432, but down on the number licences issued annually between 2002 and 2006 (Figure 3.29).

Figure 3.29 Number of short-term RSLs Number of licences issued 500

400

300 493 489 498 475 464 450 432 438 200 393 423 343

100

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Ofcom

A wide variety of events and services use RSLs

The most common reason for running a short-term restricted service in 2008 was to trial a potential community radio station; 114 S-RSLs were issued for this purpose. Educational

178 stations for colleges and schools accounted for around a quarter of services (105), while religious events received 92 licences, often being issued for key dates in the Christian, Muslim, Sikh and Hindu calendars; a third of these licences are used for the observance of Ramadan.

Festivals received 54 licences, for events such as the Flower Festival in Lincolnshire, Glastonbury festival and the Royal International Air Tattoo at RAF Fairford in Gloucestershire. In 2008 sports events received 48 temporary licences, including motor rallies, Wimbledon 2008, yachting, regattas, and golf tournaments. Other services which use RSLs include drive-in movies, charity fundraisers, dog agility shows and trials for commercial stations.

Figure 3.30 Reasons for running a short-term RSL: 2008 Share of licences 30%

25%

20%

15% 26% 24% 10% 21%

5% 12% 11% 6% 0% Community trial Student and Religious Festival Sports events Other educational

Source: Ofcom

Long-term RSLs (L-RSLs)

L-RSLs are a means of providing a service for the non-resident population within a defined establishment such as hospital patients and staff, students on a campus, or army personnel and their families within barracks. They are available on demand, provided they meet the licensing criteria and that a suitable frequency is available. Licences are renewable after the initial five-year term, and are usually not subject to competition from other applicants.

L-RSLs use broadcasting spectrum that is either unsuitable for other broadcast uses, or is in areas of low demand from other users. Most services are licensed on AM because of the scarcity of FM frequencies.

With four new licences awarded in 2008, there are currently 98 long-term RSLs in operation. Of the 98 L-RSLS, 49% are used to provide services in educational establishments, 38% in hospitals and 13% for the armed forces (Figure 3.31).

Of the four new services, two are for technology colleges (one in Cumbria and one in Cornwall); one is Traffic Radio, which provides travel and traffic information for visitors to the Birmingham NEC; and one is a BFBS Gurkha service at Beacon Barracks in South Wales.

179 Figure 3.31 Reasons for running a long- term RSL: 2008 Share of licences

60% 49% 50% 38% 40%

30%

20% 13% 10% 1% 1% 0% Educational Hospitals HM Forces Tourist Traffic and establishments information Travel

Source: Ofcom

Audio distribution systems restricted service licences (ADS-RSLs) in 2008

A new type of RSL was introduced in 2007, in the form of audio distribution systems restricted service licences (ADS-RSLs). These licences are issued for broadcast services using spectrum outside the 'traditional' broadcast bands (i.e. FM and AM). The launch of the licence was preceded by a trial in which eight companies operated services at a range of different venues, including major sports stadia.

The services licensed as ADS-RSLs typically offer commentary and other information for attendees within a stadium or venue on specially-designed radio receivers for sale at the event (as they do not use standard broadcast frequencies).

Ofcom had awarded six ADS-RSLs by summer 2009, including to Arsenal Football Club (for The Emirates Stadium), the O2 Arena, Barnsley Football Club, Warwickshire County Cricket Club, Crescent Comms Ltd, (which operates services at a variety of rugby matches), and Sound Decisions, which operates ADS services at various locations.

180 3.3 The radio listener

The following section looks at changing patterns of radio listening in the UK over the past five years, using audience data to analyse listening by sector and by age group. It also draws on consumer research which monitors changing trends, including the adoption and use of digital radio platforms.

Key points in this section include:

 Time spent listening to radio services was down by 5% in five years, and by 1.7% year-on-year; reach was down by one percentage point since 2003 at 89.5%. BBC Radio hours were down by 0.5% during 2008 but still up modestly (0.2%) since 2003. By contrast, all commercial radio listener hours were down; 3.2% in the year and 11.4% over five years (page 184).

 Listening to national radio has risen, although local radio hours have contracted. BBC network radio hours have risen by 6.4% in five years and national commercial hours are up 16.9%, although down on the past year. By comparison, local BBC stations fell by 19.1% and local commercial by 18.3% (page 184).

 The decline in radio hours has been most notable among younger listeners, falling by 21% among 4-15 year-olds between 2003 and 2008. Reductions in listening grow progressively smaller as radio audiences get older. Among younger adults (15-24), hours were down 12.0%; among 25-34s they were down 11.1%. Listening among older age groups was more stable; down by 1.7% among listeners aged 55+, while hours were stable over the last five years among 45-54 year olds (page 183).

 Many digital-only stations saw their audience increase over the past year, helped by the growing take-up of DAB digital radio sets as well as by growth in listening via other digital platforms. Of the top 11 digital stations in Q1 2009, five were BBC stations, and four were owned by the Bauer Radio group (page 186).

 Listening to radio while online, using either a receiver or a website, had been tried by around a third of adults (32%), according to Ofcom research carried out in April 2009. This was more popular among younger age groups with almost half of people aged 15-24 having listened to the radio while online (page 192).

 Around one in eight (13%) adults claim to have used their mobile phone to listen to the radio, up by eight percentage points in five years. This means of accessing radio is also most popular among younger people (15-24), with almost one third (31%) listening via their mobiles by Q1 2009 – up from 15% five years earlier (page 189).

3.3.1 Radio reach

Weekly radio audiences relatively stable in 2008, reaching nine in ten adults

The proportion of UK adults listening to radio on a weekly basis for at least five minutes fell by one percentage point over five years to 89.5% in 2008. Over this time the BBC’s radio audience remained stable, attracting around two-thirds (66%) of the adult population. Commercial radio reach fell by three percentage points over five years to 62% in 2008.

181 BBC network radio reach rose by one percentage point in 2008 to 59%, while BBC local/nations’ station reach fell by one percentage point to 19%. Commercial radio reach also rose by one percentage point year on year (after several years of reductions), with exactly half of adults listening to local commercial stations weekly. Over a quarter of adults (27%) listened to national commercial radio on a weekly basis, unchanged on 2007 (Figure 3.32).

Figure 3.32 Reach of radio, by sector

% of population

100% 90% 91% 90% 90% 90% 90% All radio 66% 66% 67% 66% 66% 66% 80% All BBC 65% 63% 63% 64% 61% 62% All commercial 60% 58% 58% 58% 58% 58% 59% BBC network 54% 52% 51% 52% 49% 50% 40% Local commercial 26% 27% 26% 27% 27% 27% 20% National commercial 21% 20% 21% 21% 21% 19% BBC nations / local 0% 5% 5% 6% 6% 6% 6% Other 2003 2004 2005 2006 2007 2008

Source: RAJAR, (adult listeners 15+).

3.3.2 Listening hours

BBC network increase share of listening rose in 2008

BBC network radio share of listening rose again in 2008, up one percentage point year on year to 46.4% and up by 2.7 percentage points in five years. National commercial radio’s share of listening fell by 0.7 percentage points to 10.6% during 2008, this was still up by 0.6 percentage points on the 2003 figure.

Local commercial radio share was stable during 2008, at almost a third of all listener hours (31.6%) but was down on 2003, when it stood at 35.7%. The BBC’s local and nations stations have also lost share over five years, down by 1.7 percentage points to 9.3% (and down by 0.7 percentage points year on year) (Figure 3.33).

Figure 3.33 Share of listening hours, by sector % of listening hours

60% 54.0% 55.1% 55.4% 55.7% 53.0% 54.4% All BBC 42.0% 43.0% 44.0% 45.4% 46.4% 43.2% BBC Network 45.0% 40% 44.2% 42.8% 43.2% 42.4% 42.2% BBC local / nations 35.7% 34.2% 32.7% 32.8% 31.1% 31.6% All commercial 20% National commercial 11.0%11.0% 11.1% 10.4% 11.3% 10.6% 10.0% 10.0% 10.1% 10.5% 10.0% 9.3% Local commercial 0% 2.0% 1.8% 2.1% 2.3% 2.2% 2.1% Other 2003 2004 2005 2006 2007 2008

Source: RAJAR, (adult listeners 15+).

182 Older people listen to the radio for longer

The average time spent listening to the radio was 18.7 hours per week in Q1 2009, down from 19.0 hours in Q1 2008. It rises with age; for 15-24s it was 15.6 hours per week, compared to over 22.5 hours for those aged 45+. On average, men listened for 2.3 hours more than women, and people in the C2DE socio-economic group listened for 1.1 hours more than ABC1s (Figure 3.34).

Figure 3.34 Demographic profile of overall listening Weekly listening hours

Average listening per week (all aged 4+) 18.7 hours 20

22.7 22.9 23.0 10 19.9 21.1 21.4 20.8 17.7 19.1 19.7 15.6 8.7

0 4-14 15-24 25-34 35-44 45-54 55-64 65-74 75+ Adult Adult ABC1 C2DE Men Women Adults Adults

Source: RAJAR Q1 2009, (average weekly listening hours per head of population)

Listening among younger age groups has fallen fastest since 2003

Over the past five years, levels of radio listening have fallen among most age groups, with all adults’ (15+) listening down by 5.0% between 2003 and 2008. The fall was more pronounced among younger listeners; hours fell furthest among children (aged 5 to 15) down by 21%.

For young adults aged 15-24 and 25-34, listening hours were also down (by 12% and 11% respectively). They fell less among 35-44s and those over 55 (by 6% and 2% respectively) and were stable among 45 to 55 year-olds.

Figure 3.35 Changes in listening hours by age, 2003 - 2008 Percentage change in listening hours

All 15+ 4-15 15-24 25-34 35-44 45-54 55+ 5% 0.0% 0% -1.7% -5% -5.0% -6.3% -10% -12.0% -11.1% -15%

-20% -21.0% -25%

Source: RAJAR: data based on calendar years 2003 versus 2008.

183 The distribution of listener hours among station types varies substantially by age. Over-55s made up a disproportionate number of BBC radio listeners. They accounted for 70% of hours on BBC local/national radio and 41% on networked stations; even among national commercial radio, the over-55s accounted for a third of hours. For local commercial stations, the pattern was different, with a more even distribution of hours across age groups. (Figure 3.36).

Figure 3.36 Profile of audience by age, for different station types Proportion of hours 100% Adults 55+ 20% 80% 36% 35% 41% Adults 45-54 19% 70% Adults 35-44 60% 17% 14% 20% 17% 16% Adults 25-34 40% 17% 12% 15% 16% 13% 13% Adults 15-24 20% 16% 13% 12% 16% 8% 9% 4% 6% 8% 10% 4% 3% All Individuals 4 - 0% 2% 14 All radio National Local BBC UK BBC commercial commercial network local/national

Source: RAJAR Q1 2009

National radio stations have grown more popular with listeners since 2003

Total hours of radio listening have fallen by 5% over the past five years. While the BBC has, overall, managed to avoid losing listener hours, the combined hours of listening to commercial radio fell by 11.4% between 2003 and 2008. This was driven by reductions in listening to local radio stations with BBC nations/local radio hours down by 19% and local commercial down by 18%. But the national radio stations (BBC and commercial radio) attracted a larger number of listener hours over the period (up by 6.4% and 16.9% respectively).

Figure 3.37 Change in listening hours 2003-2008, by sector Percentage change in listening hours

All Radio All BBC All Commercial BBC network radio BBC local / national National commercial Local commercial

20% 16.9% 6.4% 10% 0.2% 0% -10% -5.0% -20% -11.4% -19.1% -18.3%

Source: RAJAR: data based on calendar years 2003 versus 2008.

3.3.3 Most listened-to radio stations

Six BBC stations in the top fifteen; Bauer had four and Global three

The BBC’s main five network stations (BBC Radio 1-5) and the BBC World Service ranked in the top 15 most listened-to stations (as measured by reach). The BBC’s World Service’s reach rose by 9.8%, possibly aided by its presence on digital platforms. BBC Radio 2 was still the leading UK station, with a weekly audience of 14.8 million people (including children).

184 Among the BBC portfolio, Radio 3’s reach rose furthest over the year (12.7%), while Radio 4’s increased by 5.2% over the same period.

The two largest commercial groups, Bauer and Global, together accounted for nearly half of the top fifteen stations in 2008. Bauer owned four to Global’s three. Classic FM’s (Global) reach was highest, at 5.7 million weekly listeners, although this was down on a year ago (5.9 million). Absolute Radio (formerly Virgin Radio) experienced a significant fall in reach, of 31% year on year, following a change of ownership and a re-brand. Digital station The Hits – the most listened-to digital-only station – also lost listeners (-23%) after being taken off a number of local DAB multiplexes. London stations Capital and Kiss 100 possibly benefited from Absolute’s falling reach in the capital (where it has a presence on FM), with increases in reach of 17% and 16% respectively.

Figure 3.38 Most listened-to radio stations, Q1 2009 Weekly reach (thousands) % change year-on-year

15 -1% -2% Radio group 12 BBC + 5% Global 9 UTV 14.8 + 3% 6 12.8 -5% Bauer 10.5 Absolute 3 6.8 + 2% + 2% 5.7 + 4%+ 16% + 17% + 13% - 31% -23%+ 10% + 0.2% 2.7 2.3 2.22.2 2.1 2.1 1.9 1.8 1.5 1.5 0 BBC BBC BBC BBC ClassictalkSPORT Heart Magic Kiss 100 95.8 BBC Abs olute The HitsBBC World Smash Radio 2 Radio 1 Radio 4 Radio FM 106.2 FM 105.4 FM Capital Radio 3 Radio Service Hits Radio FIVE LIVE London Radio Source: RAJAR, Q1 2009 (all listeners 4+), figures are rounded.

Many digital-only stations’ increased audiences over the year

Listening to radio services that are available only on a digital platform continued to rise year on year, for a number of digital stations. Growth was aided by the increasing take-up of digital platforms, and DAB digital radio sets in particular. Of the top 11 digital stations in Q1 2009, five were BBC stations, and four were owned by the Bauer Radio group.

BBC Radio 6 Music and BBC Radio 7 both saw their reach rise by around a quarter over the year, with BBC Radio 7 now attracting over a million listeners a week. Two new commercial stations also made an impact; by Q1 2009 Jazz FM was attracting half a million listeners a week and NME Radio was reaching almost a quarter of a million, with both stations being controlled by independent operators. Another independently-owned station, Planet Rock, is available on the national DAB multiplex, and its reach rose by 16.6% year on year to reach an audience of nearly 800,000 per week by Q1 2009.

185 Figure 3.39 Most listened-to digital-only stations, Q1 2009 Weekly reach (thousands) % change year-on-year

Radio group 2000 - 23% + 10% + 0.2% 1500 Bauer + 24% BBC 1000 1,771 + 17%+ 26% + 1% -1% 1,499 1,456 + 6% Global 1,079 new + 11% 500 777 Absolute 705 684 642 619 new + 25%-19%- 14% 426 259 241 98 0 237 209 Other The Hits BBC Smash BBC Planet BBC 6 1Xtra FIVE Heat Jazz FM Q NME Chill Absolu.Absolu. World Hits Radio 7 Rock Music from the LIVE Radio ClassicXtreme Service Radio BBC SPORTS Rock EXTRA

Source: RAJAR, Q1 2009, (all listeners 4+), figures are rounded.

In June 2009, a new digital-only station became available on the national commercial multiplex; Amazing Radio is a music station which broadcasts tracks by unsigned musical artists. The station is owned by the Amazing Media Group and is based on content from the company’s music website amazingtunes.com .The website allows unsigned music artists to upload their tracks, with 70% of any revenues from downloads being paid to the artist. The site was launched in 2006 and contains around 17,500 music tracks. Listeners to the Amazing Radio station can also select which tracks they would like to hear broadcast on air via the station website. The Amazing Radio station is initially being broadcast as a six-month pilot on the national DAB multiplex.

Listening highest at breakfast, falling over the day

Breakfast is the peak time for radio listening and a station’s share at breakfast generally reflects its overall market share.

BBC Radio 1 closed on BBC Radio 2’s breakfast audience share in the year to Q1 2009. The Chris Moyles Show on Radio 1 and the Terry Wogan breakfast programme both attracted audiences of 7.7 million, with Radio 2 ahead by around 70,000 listeners at breakfast but down by around 300,000 year on year. By comparison, BBC Radio 4’s Today programme attracted 6.7 million breakfast listeners, up by 300,000 on last year.

Classic FM was still the largest commercial national operator at breakfast-time, with a reach of 2.7 million for the Simon Bates show, although this was down by 150,000 listeners on last year. The breakfast audience for talkSPORT’s Alan Brazil show was down by 150,000 to 1.0 million, but this was enough to overtake Absolute, whose audience fell by around 400,000, with 0.8 million listening to the Christian O’Connell breakfast show.

186 Figure 3.40 Breakfast-time reach of national stations Breakfast reach (millions) 10

8.1 7.7 7.7 7.8 8 6.4 6.7 ` 6 Q1 2008 Q1 2009 4 2.8 2.7 2.3 2.4 2 1.2 1.2 0.8 0.7 1.0 0.8

0 BBC Radio BBC Radio BBC Radio BBC Radio BBC Radio Classic FM talkSPORT Total Virgin 1 2 3 4 5 Live (AM/FM)

Source: RAJAR Q1 2009, adult listeners 15+.

Listening patterns vary across the UK nations

Analysis of listening patterns by nation reveals a degree of variation in the consumption of radio by nation. There was a greater preference for local radio content in Scotland and Northern Ireland, while BBC network services were more popular in Wales and England.

 In Scotland the most popular category was local commercial radio, which attracted a 41% share of all radio listening – in contrast to the UK average of 32%. The share of BBC network listening in Scotland was nine percentage points lower than the UK average, at 35%.

 In Northern Ireland, the BBC networks’ share of listening was the lowest in the UK, at 30%, 16 percentage points below the UK average of 46%. However, listening to BBC local and nations’ services (Radio Ulster and Radio Foyle), was 13 percentage points higher than average at 23%. Overall, combined BBC share in Northern Ireland was 53%, just below the UK average of 56%.

 Listening patterns in Wales were similar to the UK average. Listening to BBC services for Wales (BBC Radio Wales / BBC Radio Cymru) attracted a share of 14%, four percentage points higher than the UK average, while local commercial listening was 6 percentage points lower than average, at 26%. Overall, BBC stations accounted for 63% of listening in Wales, compared to 56% for the whole of the UK.

 In England, the BBC network stations were the most popular station category, with a 47% share of all listening. BBC local services attracted a 10% share, while local commercial radio secured 31% of all listener hours.

187 Figure 3.41 Share of listening hours, by nation % of listening hours 100% 2% 2% 2% 8% 2% Other 26% 80% 31% 32% 41% 32% Local 9% Commercial 60% 11% 11% 14% 8% National 9% 11% 10% Commercial 40% 9% 23% BBC Local/National 47% 49% 46% 20% 37% BBC Network 30%

0% EnglandEnglandScotland ScotlandWales WalesNorthern N Ireland UK TOTAL UK Ireland

Average weekly listening 22.3 hours 21.6 hours 23.2 hours 22.7 hours 22.4 hours Reach 89.5% 87.4% 91.0% 87.1% 89.4% Source: RAJAR / Octagon, year to Q1 2009, (all listeners 15+).

3.3.4 Radio ownership and listening trends

Ownership of digital radio enabled platforms

Access to digital radio platforms has continued to increase over the year. Almost nine in ten homes (89%) had digital television by Q1 2009, and consequently also had access to digital radio channels via the television. Homes with broadband internet access increased to 67%, providing access to live digital radio, as well as listen-again and downloadable radio content. DAB radio ownership was up to almost a third of adults (32%) by Q1 2009.

Figure 3.42 Take-up of equipment capable of receiving digital radio

Year-on-year increase (pp) +3 +2 +5 Share of households 70% 89% 32%

90% 80% Cable 13%

70% Dial-up / Mobile 5% 60% Satellite 37% 50% 40% Broadband 30% 65% 20% Terrestrial 38% 32% 10% 0% Internet Digital TV DAB radio

Source: Research from: Ofcom, GfK, RAJAR, Q1 2009

188 One-third of younger listeners (15-24) using mobiles to access radio

A growing number of younger people are using their mobile to access radio content thanks to the rising take-up of handsets equipped to receive broadcast services. Some of these devices are able to deliver streamed radio or to store and play downloaded audio content.

Around one in eight (13%) adults claim to have used their mobile phone to listen to the radio, up by eight percentage points in five years. This is particularly popular among younger people (15-24), with almost one third (31%) listening via their mobiles by Q1 2009 – up by 16 percentage points, from 15% five years earlier.

Figure 3.43 Listening to the radio via mobile phone Percentage of adults who claim to have ever listened to radio via mobile phone

All adults 15-24s 25+ 40% 31% 30% 27% 20% 20% 18% 17% 15% 12% 13% 8% 9% 10% 10% 6% 6% 5% 4% 6% 3% 4% 0% Q1 2004 Q1 2005 Q1 2006 Q1 2007 Q1 2008 Q1 2009

Source: RAJAR / Ipsos MORI / RSMB Q1 2009.

DAB sets now account for a fifth of all radio sales

DAB digital radio sales account for an increasing proportion of total radio set sales. In the year to Q1 2009, DAB sets made up over a fifth (22%) of all radio sales by volume, with around 2.1 million units sold in the year to Q1 2009. This was up from a 20% share the year before. In the portable market, DAB sets accounted for 62% of sales. Total radio set sales (analogue and digital) were down by one million to 9.4 million in the year; the majority of this fall was seen in analogue radio sets.

Figure 3.44 Number of analogue and digital radio sets sold

Total annual sales 11.6 million 9.7 million 10.4 million 9.4 million

Share of sales 87.1% 12.9% 81.4% 18.6% 79.8% 20.2% 77.9% 22.1% 10.1 10 7.9 8.3 8 7.3 Analogue sets 6 DAB sets 4 2.1 1.5 1.8 2.1 2 0

Radio set sales (millions) sales set Radio Year to Q1 2006 Year to Q1 2007 Year to Q1 2008 Year to Q1 2009

Source: GfK sales data, Q1 2009

189 The value of DAB radio set sales totalled £167m in the year to March 2009, relatively stable on £168m the year before. This represented around 29% of all radio set sales by value, up from a 26% share the previous year. The value of analogue radio sales fell by £49m in the year to £404m. This meant that overall the value of all radio set sales of reached £571m in the year to March 2009, down by over £50m on £622m the year before.

Figure 3.45 Value of analogue and digital radio set sales

Total annual sales £743m £644m £622m £571m

Share of sales 80.5% 19.5% 75.9% 24.1% 72.9% 27.1% 70.7% 29.3% £598 £600 £489 £500 £453 £404 £400 Analogue sets £300 DAB sets £200 £145 £155 £168 £167 £100 £0

Value of radio sales (£ (£ ofmillions) sales radio Value Year to Q1 2006 Year to Q1 2007 Year to Q1 2008 Year to Q1 2009 Source: GfK sales data, Q1 2009

The average price paid for a DAB digital radio set rose by £10 to £85 in Q1 2009, although the cheapest sets start at £15. Portable sets cost £56 on average, up by £4 on last year, while car audio sets fell by £15 to £80. In-home and DAB hi-fi prices increased by £6 on average, to £155 in Q1 2009 (Figure 3.46).

Figure 3.46 Average price of DAB digital radio receivers

£500

£400

£300

All £200 In-home £100 Car audio Portable £0 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2003 2004 2005 2006 2007 2008 2009

Source: GfK sales data Q1 2009

Around one in six people (16%) said they were likely to purchase a DAB digital radio set over the next year, with 6% saying they ‘very likely’ or ‘certain’ to.

190 Figure 3.47 Intention to buy DAB digital radio ‘How likely is it that your household will get a DAB radio in the next 12 months?’

30% 28% 22% 20% 13% 10% 10% 4% 2% 0% Certain to Very Likely Fairly likely Unlikely Fairly unlikely Certain not to

Source: Ofcom research, Q1 2009 Base: Those who listen to the radio but have no DAB sets at home (n=1421) Q: How likely is it that your household will get a DAB radio in the next 12 months?

3.3.5 The impact of the internet on radio listening

Broadcast radio listening hours have fallen in recent years. One driver may have been the amount of time people spend on the internet, although radio listening may not have been displaced as much as other media, since users can listen to the radio while surfing the web.

Research from Q1 2009 showed that, overall, one in 20 people claimed to listen to less radio since getting access to the internet. Listening among 25-44s had been the most affected by consumer access to the internet, with 8% listening less; 4% of 15-24s made the same claim and 3% of those aged 45-64.

Figure 3.48 Levels of radio listening since getting internet access Since using the internet which activities do you undertake less? – listening to the radio 10%

4% 8% 5% 2% 4% 3% 3%

0% All 15-24 25-44 45-64 65+

Source: Ofcom research Q1 2009. Base: All who use the internet at home (n=732) Q: Since using the internet for the first time, which if any of the following activities do you believe you undertake less, either because you spend that time using the internet or you no longer need to because you can find the information on the internet; Listening to the radio?

191 A third of all web users have listened to radio concurrently while online

The ability to listen to the radio while online means that the web can stimulate overall levels of radio listening (either through an online service or through a separate radio set). Listening to the radio while online had being tried by around a third of adults (32%), according to Ofcom research carried out in April 2009. Of this total 7% of internet users said they did so frequently, with 16% saying they ‘sometimes listened’.

Figure 3.49 Radio listening while online All who use the internet at home 63% 50%

40%

30%

20% 16% 7% 9% 10%

0% Frequently Sometimes Rarely Never

Source: Ofcom research Q1 2009. Base: All who use the internet at home (n=728) Q: At the same time as being on the internet, how frequently, if at all, do you also do any of the following activities? Listen to the radio.

Almost half of people aged 15-24 listen to the radio while online

By age group, listening while online was more popular among younger people, with just under half of 15-24s having tried it. It was less prevalent among older age groups, perhaps suggesting that younger users are more familiar with using multiple media sources concurrently.

Figure 3.50 Listening to the radio while online, by age group All who use the internet at home

60% 47%

40% 32% 34% 26%

20% 17%

0% All adults 15+ 15-24 25-44 45-64 65+

Source: Ofcom research April 2009. Base: All who use the internet at home (n=728) Q: At the same time as being on the internet, how frequently, if at all, do you also do any of the following activities? Listen to the radio.

192 3.3.6 Location of listening

The location of radio listening has evolved over time, with a 16% of listening now taking place outdoors or at work in Q1 2009, compared to 13% in 2004. This increase might have been helped by the growth in listening to podcasts or on mobile phones while on the move, or when commuting. In-car listening accounted for 18% of all listening in Q1 2009, up from 16% in Q1 2004. As a result, home listening share was down from 69% to 63% over the five years.

Figure 3.51 Location of listening Listening hours by location (and percentage point change on five years previously)

(no change Other over 5 years) 1% Work / outdoors Car 16% 18% (+3% over 5 years) (+3% over 5 years)

Home 63% (- 6% over 5 years)

Source: RAJAR / Octagon, all listeners, year to Q1 2009

3.3.7 Satisfaction with radio services

With a growing choice of radio stations over recent years, consumer satisfaction with radio choice is high and growing; 91% of respondents said they were ‘very’ or ‘fairly’ satisfied with the choice and range of radio stations, up from 88% last year. The number of people who were ‘very satisfied’ was 61%, up from 48% last year, while only 3% said they were dissatisfied with station choice (4% a year ago).

Figure 3.52 Satisfaction with choice of radio stations % of respondents who listen to radio 61% 60% 50% 40% 30% 30% 20%

10% 4% 2% 1% 0% Very satisfied Fairly satisfied Neither Fairly dissatisfied Very dissatisfied

Source: Ofcom research, Q1 2009 Base: All who listen to the radio (n=2483) Q: How satisfied are you with the choice of radio stations available in your area?

193 Satisfaction with radio content is also high, with 94% claiming to be very, or fairly, satisfied with the overall quality of radio programming. By contrast only 1% were ‘fairly dissatisfied’ and almost none ‘very dissatisfied’.

Figure 3.53 Satisfaction with radio content How satisfied are you with the content of what you listen to on the radio?

% of respondents who listen to radio 60% 53% 50% 41% 40%

30%

20%

10% 5% 1% 0% 0% Very satisfied Fairly satisfied Neither Fairly dissatisfied Very dissatisfied

Source: Ofcom research, Q1 2009 Base: All who listen to the radio (n=888) Q: How satisfied are you with the content of what you listen to on the radio?

194

The Communications Market 2008

4 Telecoms

195 Contents

4.1 Key market developments in telecoms 197 4.1.1 Introduction 197 4.1.2 A decade of change: the shift towards mobile and data services 198 4.1.3 How the growth of local loop unbundling is reshaping the internet service provider (ISP) market 200 4.1.4 Super-fast broadband becomes a reality 204 4.1.5 Mobile broadband market begins to mature 206 4.1.6 Smartphones and applications drive more sophisticated use of mobile internet 208 4.1.7 Low-price post-pay plans drive growth in contract subscriptions 213 4.1.8 A new era for MVNOs 217 4.2 The telecoms industry 221 4.2.1 Introduction 221 4.2.2 Industry overview 221 4.2.3 Fixed voice telephony 225 4.2.4 Mobile telephony 230 4.2.5 Internet services 233 4.2.6 Business markets 236 4.3 The telecoms user 241 4.3.1 Introduction 241 4.3.2 Household spend and pricing 242 4.3.3 Take-up of services 246 4.3.4 Fixed-line and mobile use 252 4.3.5 Customer satisfaction and switching 255

196 4.1 Key market developments in telecoms

4.1.1 Introduction

Figure 4.1 UK telecoms industry: key statistics

UK telecoms industry 2003 2004 2005 2006 2007 2008

Operator-reported retail revenue (£bn) 25.8 28.0 29.0 29.7 30.9 31.0

Operator-reported wholesale revenue (£bn) 8.5 8.8 8.4 8.5 8.6 8.5

Total operator-reported revenue (£bn) 34.3 36.6 37.4 38.2 39.5 39.5

Fixed voice call minutes (billions) 167.0 163.3 159.4 148.8 146.5 138.6

Mobile voice call minutes (billions) 58.9 64.2 71.4 82.5 99.9 111.0

Average monthly household telecoms spend (£) 67.72 71.84 72.21 70.09 68.84 65.01

Fixed access and call revenues (£bn) 11.2 10.6 9.9 9.4 9.3 9.0

BT share of fixed revenues (%) 62.2 59.2 57.2 54.9 54.3 52.9

Proportion of households connected to an - - 39.6 66.6 80.3 84.3 unbundled exchange (%)

Fixed lines (millions) 34.9 34.5 34.0 33.5 33.5 33.2

Mobile retail revenues (£bn) 9.7 11.9 13.1 13.8 15.0 15.4

Active mobile connections per 100 population 88.0 99.6 108.9 115.6 121.4 126.1

Active 3G mobile connections per 100 population 0.4 4.3 7.6 12.9 20.6 29.3

Internet connections per 100 population 22.4 25.5 27.0 28.9 30.7 31.5

Broadband connections per 100 population 5.2 10.2 16.5 21.7 26.0 28.8

Source: Ofcom / operators

We start this section by looking at key metrics of the UK telecoms market in terms of revenues, connections and usage patterns. We then look at seven key themes that highlight how developments in the industry are extending consumer choice and changing consumer behaviour. These themes are:

 A decade of change: the shift towards mobile and data services. We assess the transformation of the telecoms market over the last ten years as mobile phone and internet services have become mass-market (page 198).

 How the growth of local loop unbundling is reshaping the internet service provider market. With the cost structures associated with providing LLU-based services determining that ‘bigger is better’, we examine how the broadband market has been transformed since the introduction of LLU, both in terms of market size and the subscriber shares of the larger players (page 200).

 Super-fast broadband becomes a reality. We look at the emergence of the UK’s first super-fast broadband services, which are now being implemented after much anticipation, and consider how these services might impact the ISP market (page 204).

 Mobile broadband matures. Around three million people in the UK now access broadband services provided over a cellular network via USB modems (or ‘dongles’). As the market matures we examine the relationship between mobile and fixed broadband services (page 206).

197

• Smartphones and applications drive more sophisticated use of ‘mobile internet’. In this section we look at the rise of the ‘mobile app’ and how advances in mobile handset technology are affecting the way in which we use our mobile phones to access online services (page 208).

• SIM-only contracts central to new focus on low-cost tariffs. We consider the changes in operator strategy and consumer behaviour that have resulted in a growth in the share of pay-monthly contracts, driven primarily by the take-up of sub-£20-a-month tariffs (page 213).

• New MVNOs gain market share. We examine the market conditions that have seen a raft of virtual network operators and service providers launch in the last couple of years and win market share (page 217).

4.1.2 A decade of change: the shift towards mobile and data services

Over the past three decades the telecoms sector has seen the emergence and growth of new technologies and services. Until the 1980s the telecoms market was primarily focused on fixed-voice telephony services, with some additional data products aimed at business customers. The first analogue mobile services launched in the UK in 1985, but high prices stifled take-up and it was only with the introduction of pre-pay services in the second half of the 1990s that mobile telephony became a mass-market phenomenon.

The late 1990s also saw the growth of the residential market for internet access, with the emergence of narrowband internet services, and at the end of 2000 the first always-on broadband internet services were launched. This shifting telecoms landscape is reflected in the revenues generated by these different services over the last decade (Figure 4.2).

Fixed voice revenues have been in decline since 2000 when they reached £12.3bn, and had fallen by 26.9% in nominal terms from this peak to £9.0bn by 2008. Growth in mobile voice revenues, which more than tripled from £3.6bn to £11.5bn between 1998 and 2008, ensured continued growth in total voice telephony revenues until 2008, when they declined for the first time.

Figure 4.2 Operator-reported UK telecoms industry retail revenue

30.9 31.0 29.0 29.7 Mobile data 30 28.0 0.6 0.8 0.9 25.1 25.8 0.2 2.40.4 2.6 2.9 2.9 24.0 0.1 2.0 Mobile messaging 22.6 1.4 1.7 20.2 0.4 1.0 9.7 10.3 10.6 11.3 11.5 20 17.9 6.9 7.6 7.9 Mobile voice 4.8 6.1 3.6 2.4 2.5 2.6 2.8 2.9 2.1 2.3 1.4 3.1 3.1 3.2 3.2 1.1 1.3 1.8 1.7 2.1 2.6 Corporate data services 10 3.0 3.3 3.3 3.4 Retail revenue revenue Retail (£bn) 12.3 11.1 11.8 11.7 11.7 11.2 10.6 9.9 9.4 9.3 9.0 Fixed data

0 Fixed voice 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: The bundling of messaging and data services in with monthly rental tariffs mean that there will be an element of mobile data revenue included in mobile voice revenues

The rapid mobile subscriber growth initiated by the introduction of pre-pay services ensured heavy investment in mobile services, culminating in the auction of the five 3G licences in 2000 (which raised £22.5bn) and the subsequent roll-out of 3G networks. By 2008 mobile

198

services generated almost half (49.6%) of total UK telecoms revenues and they look set to overtake fixed telephony revenues in 2009 (Figure 4.3).

Figure 4.3 Mobile and data services as a proportion of total operator-reported retail revenue 60 48.7 49.6 45.1 46.5 42.6 Proportion 37.6 mobile 40 36.0 33.0 voice and

cent 28.6 data 24.2 32.5 33.3 33.8 Per 20.3 30.3 27.7 Proportion 20 25.8 22.2 23.2 fixed and 18.0 17.7 18.5 mobile data 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Data include narrowband internet, broadband internet and corporate data services in the fixed market and SMS, MMS, mobile broadband and other mobile internet services in the mobile market

However, mobile voice revenue growth has slowed significantly as penetration has plateaued and prices have fallen. (Section 4.1.7 details how the launch of SIM-only contracts in the last two years has contributed to lower prices). Mobile voice revenue growth was just 1.6% in 2008, compared to an average of 7.7% annual growth over the previous five years. As voice services generate nearly three-quarters of total mobile revenue, there was a similar slowing in the growth of total mobile service revenues, to 2.2% in 2008, compared to the annual average of 9.6% growth over the previous five years and 15.5% over the previous ten years (Figure 4.4).

Figure 4.4 Fixed and mobile operator-reported UK telecoms industry retail revenue

40 2008 10 year 30.9 31.0 growth CAGR 29.0 29.7 30 28.0 25.8 24.0 25.1 22.6 Mobile 2.2% 15.5% 20.2 13.1 13.8 15.0 15.4 9.7 11.9 revenues 20 17.9 6.5 7.9 9.0 4.9 3.6 Fixed -1.4% 0.9% 10 revenues Revenues (£bns) 14.3 15.3 16.1 16.0 16.1 16.1 16.1 15.9 15.9 15.8 15.6

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Ofcom / operators

In addition to mobile voice, data revenues have also contributed strongly to operator revenue growth since 1998. In the fixed sector this has been the result of increasing residential and business internet penetration (firstly of dial-up narrowband services and then broadband) and in the mobile market primarily because of growing use of SMS text messaging (Figure 4.5). In 2008 data services contributed over a third (33.8%) of total operator-reported revenues, up from 18.0% a decade previously.

199

However, like voice, the growth in data revenues has been slowing significantly, and was just 1.9% in 2008, compared to 6.4% in 2007 and 9.9% in 2006. Revenue from residential fixed-line data services (mainly the provision of broadband) has hardly changed since 2006, while growth in revenues from mobile data services (including SMS) and corporate data services has slowed considerably.

Figure 4.5 Voice and data operator-reported UK telecoms industry retail revenue

40 2008 10 year growth CAGR 30.9 31.0 29.0 29.7 30 28.0 25.1 25.8 24.0 10.3 10.5 22.6 7.8 8.8 9.7 Data 1.9% 12.5% 20.2 5.8 6.7 20 17.9 4.2 5.3 revenues 3.6 3.2 Voice -0.4% 3.4% 10 20.3 20.2 20.1 20.6 20.5 Revenues (£bns) 18.4 18.7 19.3 19.2 revenues 14.7 16.6

0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators

The growth in data services has required heavy infrastructure investment. First, fixed-line operators upgraded the UK’s telecoms and cable networks to support higher-speed internet connections, and then they began to roll out LLU networks. More recently, BT has upgraded its core network and has started to deploy ADSL2+, while the implementation of super-fast access networks (particularly cable, but also localised fibre deployments) is taking place (see Section 4.1.4 on the roll-out of these services). Meanwhile, provision of non-SMS data services over mobile networks was facilitated by the investment in 3G, and the subsequent upgrade to high-speed packet access (HSPA).

The new services enabled by these investments could potentially stem the stagnation in overall telecoms revenues. The important question facing operators in broadband and mobile markets is how much of a premium consumers will be willing to pay for these higher- speed services.

4.1.3 How the growth of local loop unbundling is reshaping the internet service provider (ISP) market

At the end of 2000, the year in which BT launched its broadband services, there were four main broadband providers in the UK: BT, Kingston Communications (the incumbent PSTN operator in Kingston-upon-Hull) and the two major cable operators - ntl and Telewest.

Initially cable broadband was more widely available than digital subscriber line (DSL), as BT was in the process of rolling out DSL services across its network, and cable’s share of broadband connections grew rapidly, peaking at over 60% in 2002. However, despite growth in the number of cable broadband connections, the more limited cable network footprint has seen DSL become the most widely-used form of internet access.

As DSL-based connections became more popular there was rapid proliferation in the number of broadband providers, as BT launched its IPStream and DataStream wholesale products. These enabled ISPs to offer retail DSL broadband services with a relatively modest initial capital outlay, and at the end of September 2005 BT had agreements to supply resale DSL services to over 750 telecoms providers (although not all of these were exercised). This increase in the number of active ISPs led to declining market share for most

200 providers, and increased competition between ISPs (Figure 4.6), although the reliance on BT’s wholesale products meant that there was little differentiation between services for the end-user.

Figure 4.6 Estimated UK broadband service provision retail connection share

100% 8.4 9.0 10.2 12.8 15.9 13.5 9.3 4.8 7.3 5.8 5.4 3.2 8.9 80% 2.7 8.7 8.1 7.7 11.3 12.4 7.8 5.8 1.5 0.8 2.4 8.7 10.3 8.8 9.2 11.9 1.7 1.3 13.5 24.7 60% 0.8 12.3 16.2 16.7 15.6 11.5 0.8 10.2 31.5 40% 25.4 23.7 22.8 22.5 22.4 18.5 20% 25.6 23.6 23.3 23.8 26.5 26.9 25.9 Share of connections (per cent) 0% 2003 2004 2005 2006 2007 2008 2009 H1 (E) Other Orange Home BSkyB Tiscali Pipex TalkTalk/AOL B'band/Tiscali TalkTalk/AOL Broadband AOL TalkTalk Virgin Media Telewest ntl Source: Ofcom / operators Note: 2009 H1 estimate assumes the completion of the Carphone Warehouse and Tiscali merger.

Local loop unbundling (LLU) LLU enables operators to site their own equipment in the incumbent’s local exchange, lease the local loop (the twisted copper pair from the exchange to the customer’s premises) and, after connecting the local exchange to their own network, provide either DSL broadband or DSL broadband and fixed voice services. Under partial LLU the unbundling operator and the incumbent share the same line, with the LLU operator providing DSL broadband services and the consumer continuing to be billed for voice services by the incumbent. With full LLU the unbundling operator provides both DSL broadband and voice services and the customer’s relationship with the incumbent ceases.

LLU costs mean that bigger is better

Although local loop unbundling (LLU) had been introduced several years previously, it was only in 2005 that it became an attractive alternative to BT’s wholesale DSL products for ISPs29, and the larger providers started to roll out their own LLU networks.

The cost structure associated with providing LLU services is characterised by relatively high up-front costs (purchasing network equipment, installing it in the local exchange and providing backhaul to link it to the LLU provider’s network). This is followed by low ongoing costs; the monthly rental cost of an LLU line is currently £1.30 for DSL broadband services and £7.20 for voice and broadband, although periodic capacity upgrades are also typically required as the amount of traffic through each exchange grows.

29 There are three factors which we consider contributed to this: the creation of the Office of the Telecoms Adjudicator (OTA) in 2004 to address operational issues that had previously dogged LLU, significant cuts in monthly charges in June 2004 and December 2005 and BT’s Undertakings (which took effect in 2005 and created expressions of interest whereby providers could make BT aware of those exchanges which they wished to unbundle).

201

This gives rise to an average cost per unit curve similar to that shown below in Figure 4.7. For each unbundled exchange the per-unit cost declines with each additional unit, meaning that implementing LLU requires scale in order to be cost-effective, compared to buying wholesale products from the incumbent (which are priced to average-out fixed and ongoing costs). This is one reason why LLU is more widely available in urban than in rural areas; urban exchanges tend to serve more premises, bringing a higher potential customer base.

Figure 4.7 Indicative LLU and wholesale DSL: average cost curve

ISP cost per unit saving with LLU

Breakeven LLU point Average cost per unit Wholesale DSL product

Number of subscribers

Source: Ofcom

The need for scale among LLU operators has contributed to a number of acquisitions and mergers, the most significant of which are summarised below in Figure 4.8 (O2’s acquisition of Be Unlimited in 2006 was an exception, in that it was motivated by market entry rather than to increase scale. The most recent of these was the Carphone Warehouse acquisition of Tiscali’s UK arm (Tiscali itself had been very active in the M&A market over the previous few years).

Figure 4.8 Selected ISP mergers

Date Target Acquirer

June 2006 Be Unlimited O2

July 2006 Toucan Pipex

July 2006 Bulldog (retail customer base) Pipex

August 2006 Video Networks Tiscali

October 2006 AOL UK Carphone Warehouse

July 2007 Pipex Tiscali

July 2009 Tiscali Carphone Warehouse

Source: Ofcom

The effects of consolidation in the ISP market can clearly be seen in Figure 4.9 below. Prior to the roll-out of LLU, the market share of the top five ISPs had declined from 83.1% to 73.0%. However, as the availability of LLU-based services became widespread, and ISPs merged in order to gain scale, the connection share of the top five grew to 85.8% at the end of 2008, and to an estimated 91.0% at the end of June 2009, following the Carphone Warehouse / Tiscali merger.

202

At the same time, growth in the use of LLU by ISPs, consolidation in the ISP market and the availability of wholesale LLU products from Cable &Wireless led to a fall by a third in the number of agreements with BT to provide resale DSL services, from over 750 in September 2005 to under 500 by the end of 2008.

Figure 4.9 Combined connection share of the five largest UK broadband providers

Use of wholesale Rollout of LLU DSL products 100 91.0 83.1 83.8 83.4 85.8 78.3 80 73.0

Market share (per cent) 20

0 2003 2004 2005 2006 2007 2008 2009 H1 (E) Source: Ofcom / operators Note: Step increase in 2006 is partly due to the merger of ntl and Telewest to form Virgin Media; 2009 H1 estimate assumes the completion of the Carphone Warehouse and Tiscali merger.

Although LLU has increased the concentration of the UK ISP market, it has also led to the emergence of powerful new entrants such as BSkyB and Carphone Warehouse, which have the scale to compete with established firms such as BT and Virgin Media.

LLU increases choice and enables innovation

LLU has added to the choices available to many UK consumers. At the end of December 2008, 84.3% of UK households were connected to an unbundled local exchange (up from 39.6% three years previously) and therefore had a choice of services beyond those provided using BT’s wholesale products. LLU also led to the launch of the UK’s first ‘up to’ 16Mbit/s and higher broadband services, as LLU operators installed ADSL2+ equipment in exchanges.

The low incremental cost of supplying voice services in addition to broadband services for LLU providers has also encouraged service innovation. For example, without the introduction of LLU it is unlikely that bundled service offerings with innovative tariffing such as TalkTalk’s ‘free’ broadband with voice services, or BSkyB’s See, Surf, Talk triple-play product would have emerged. We estimate that the average cost of a residential DSL broadband connection fell by over 40% in the three years to Q4 2008, with around half of this fall being the result of take-up of LLU-based services.

Falling broadband prices, and the introduction of ‘free’ or discounted broadband offers (when bundling broadband with other communication services), have been pivotal in extending the reach of fixed broadband services to a mass-market audience. From the introduction of LLU- based ‘free’ broadband offers in 2006 until Q1 2009, the proportion of households with a fixed broadband connection increased by 20 percentage points, to 65%, according to Ofcom consumer research. By the end of 2008 almost a third (33%) of these connections were provided using LLU.

203 4.1.4 Super-fast broadband becomes a reality

Super-fast broadband connections offer performance that is significantly faster than those provided using conventional copper loops. This allows consumers fast access to a wide range of video-rich information and entertainment content and means they can run multiple bandwidth-hungry applications simultaneously. In 2009, super-fast broadband became available to large sections of the UK population for the first time, while proposed deployments promise that within the next couple of years broadband speeds of at least 25Mbit/s will be available to the majority of UK households.

Virgin launches 50Mbit/s broadband service and trials 200Mbit/s

In December 2008 Virgin Media announced the launch of its XXL 50Mbit/s cable broadband product, which is delivered over its hybrid fibre-coaxial network using the DOCSIS 3.0 cable standard. This is the first widely-available residential broadband service in the UK to offer downstream speeds in excess of the ‘up to’ 24Mbit/s available using ADSL2+ services.30 The service has been rolled out across Virgin Media’s cable network, and was available to just under half of UK households in July 2009.

Virgin Media has also started to trial a DOCSIS 3.0 based 200Mbit/s service to around 100 residents in Ashford in Kent. The trial is due to last at least six months, after which Virgin Media will evaluate the commercial viability of the service. Virgin Media, in announcing the trial, highlighted the current lack of consumer hardware able to take advantage of such download speeds; there are no compatible wireless routers available and only PCs with the highest specification can handle data transferred at such high rates.

BT announces fibre-broadband investment plans

In July 2008, BT announced its plans to invest £1.5bn in a fibre-based super-fast broadband network. BT plan to have the service available to 1million households in March 2010 and the service should be available to around 40% of the UK’s homes and businesses by 2012. It will be delivered using a mix of ‘fibre-to-the-cabinet’ (FTTC) and ‘fibre-to-the-home’ (FTTH) technologies.

Fibre-to-the-home (FTTH) and fibre-to-the-cabinet (FTTC) The two main types of fibre deployment are FTTH (also known as fibre-to-the-building or FTTB) and FTTC. FTTH involves running fibre-optic cable from the local exchange to the end-user’s premises and currently is able to provide downstream broadband speeds of 100Mbit/s. FTTC involves running fibre-optic cable to the telecoms street cabinet, from where it is connected to the end-user’s premises using the standard copper local loop; it is currently able to provide downstream speeds of around 50Mbit/s. The cost of deploying FTTC is much lower than FTTH, and is the preferred option for many providers who already have a copper network. BT Openreach launched a FTTC broadband pilot scheme in Muswell Hill in London and in Whitchurch in South Glamorgan during summer 2009. Fibre is being deployed from BT’s core network to street cabinets, from where the standard copper twisted pair will connect to customer premises. The technology is expected to deliver speeds of ‘up to’ 40Mbit/s, compared to potential speeds of around 100Mbit/s delivered by FTTH.

30 Although BT is already deploying fibre-to-the-home (FTTH) in the Ebbsfleet Valley area the headline downstream speed of the fastest service is 10Mbit/s, although it is possible to burst the service to 100Mbit/s when additional speed is required.

204 In June 2009 BT also announced that it would roll out ADSL2+ technology to all of its customers without any additional charge. The service (which will be advertised as ‘up to 20Mbit/s’ and is therefore not classed as being ‘super-fast’) should be available to around 55% of the UK population by 2010. ADSL2+ services have been available in the UK since 2005 when Be Unlimited (now part of Telefónica O2) launched its ‘up to’ 24Mbit/s service.

Smaller-scale fibre deployments are also being rolled out

In addition to BT and Virgin Media’s plans, a number of smaller-scale fibre trials and deployments have recently been launched (see Figure 4.10 below). In early 2009 Fibrecity, part of H2O Networks which deploys fibre networks using the UK’s sewerage system, launched the UK’s first residential FTTH services in Bournemouth and Dundee, and it is currently rolling out a fibre network in Sheffield. The company plans to deploy a further 10- 20 developments over the next decade.

In Northern Ireland, Redstone plc has been contracted to deploy and maintain a high-speed fibre-to-the-home network in the Titanic Quarter, a development on the site of the Harland & Wolff shipyard in Belfast. The network, which is being funded as part of a joint venture between Titanic Quarter Ltd and the Belfast Harbour Commission, will initially support data speeds of 100Mbit/s in both directions and will be available to communications providers on a wholesale basis. The first commercial tenants are due to move into the main Titanic Quarter development in August 2009, with around 100 residential apartments due for occupation by Q4 2009. The site will eventually hold over 5,000 homes and commercial premises.

More information on the provision of super-fast broadband services can be found in Ofcom’s statement Delivering Super-fast Broadband in the UK31.

Figure 4.10 Selected UK super-fast broadband implementations and trials, July 2009

Company Deployment Maximum Technology Where Scale When type download speed

Virgin Media Commercial 50Mbit/s DOCSIS 3.0 Virgin Media 12.6m homes by Rollout started cable cable footprint summer 2009 Q4 2008

Fibrecity Commercial 100Mbit/s FTTH Bournemouth c88,000 homes Rollout started (H2O Networks) and Dundee on completion Q1 2009

Ti tan i c Qu arter Commercial 100Mbit/s FTTH Belfast 5,000+ premises First tenants in (Redstone plc) on completion H2 2009

BT Commercial Burst to FTTH Ebbsfleet Valley 10,000 homes on Currently serving 100Mbit/s completion <100 homes

Virgin Media Trial 200Mbit/s DOCSIS 3.0 Ashford, Kent c100 homes May 2009 for six cable months+

BT Pilot 40Mbit/s FTTC Muswell Hill and c.15,000 homes Deployed in July Whitchurch 2009

Source: Ofcom

Digital Britain recommendations set to boost super-fast broadband availability

The Government’s Digital Britain report32, published in June this year, proposed the creation of a ‘Next Generation Fund’ which would allow network providers to tender for funds to help

31 http://www.ofcom.org.uk/consult/condocs/nga_future_broadband/statement/statement.pdf 32 http://www.culture.gov.uk/what_we_do/broadcasting/6216.aspx

205 them deploy super-fast broadband networks in areas that would otherwise be unable to access such services. It is proposed that the scheme will be funded by a £6 a year annual levy on all copper lines. If implemented, the aim is that 90% of UK homes will have access to next-generation broadband services by 2017.

4.1.5 Mobile broadband market begins to mature

Market continues to grow and pay-as-you-go takes increasing share

At the end of 2007 mobile broadband (which enables users to connect to the internet with their laptop, using a cellular network via a USB modem or ‘dongle’) emerged as a viable consumer proposition, as the roll-out of HSPA networks enabled mobile operators to offer internet access at headline speeds comparable to those available through basic fixed-line broadband services. According to Ofcom consumer research, by the end of Q1 2009 around 3 million households had a mobile broadband connection (approximately 12% of all households). The majority of these connections were with the three UK mobile network operators which do not have their own fixed-line broadband network (3UK, Vodafone and T- Mobile).33

Figure 4.11 details the rapid recent growth in mobile broadband sales through consumer channels. In May 2009, over a quarter of a million new connections were added, and pre-pay (pay-as-you-go) connections exceeded post-pay connections for the first time. There are parallels with the emergence of pre-pay mobile phones in the second half of the 1990s, as the take-up of mobile broadband indicates expansion into both lower frequency users (people who want a connection for occasional or ‘emergency’ use) and into sections of the population who are unwilling or unable to commit to monthly spend. The emergence of pay- as-you-go also helps to differentiate mobile broadband from fixed-line broadband access, which is generally available only on a contractual pay-monthly basis.

Another indicator of the maturing of the mobile broadband market is the range of tariffs available. At the beginning of 2008, consumer mobile broadband services were available on only three networks, and offered data allowances of 1GB or 3GB per month via a dongle for a fixed monthly fee. By July 2009, all of the mobile network operators offered a range of tariffs on both pre-pay and post-pay:

 T-Mobile, for example, offers daily, weekly and monthly tariffs;  a wide range of usage limits is available: for example, 3UK’s tariffs range from 1GB per month to 15GB per month;  in addition to the five mobile network operators, mobile virtual network operators (MVNOs) BT and Virgin Mobile are also offering mobile broadband;  mobile broadband is available bundled with fixed-line broadband (by O2, BT and Virgin Mobile);  tariffs are available with PCs included within the monthly rental fee (and sometimes with the SIM embedded in the PC rather than via a dongle); and  following the trend in the mobile phone market, 3UK has even launched a SIM-only mobile broadband tariff.

33 Mobile Today, 19 June 2009, estimated that 3UK had 40% of mobile broadband connections, Vodafone 25%, T-Mobile 25%, Orange 13% and O2 4%

206

Figure 4.11 Mobile broadband sales, February 2008 to May 2009

300

) 263

250 224

200 138 182 185 200 94 51 175 177 165 171 45 155 154

148 39 86 68 72 139 30 Pre-pay 75 43 150 35 32 96 102 Post-pay

100 150 76 137 130 126 126 125 113 112 108 107 105 99 96 91 85 50 70 New connections (000's 0 Jun 2008 Jun Jul 2008 Jul Aug 2008 Aug Mar 2009 Mar 2008 Feb 2009 Feb Feb 2008 Feb Jan 2009 Jan May 2008 May 2009 Nov 2008 Nov 2008 Dec Sep 2008 Sep Oct 2008 Apr 2008 Apr 2009

Source: GfK Retail and Technology Ltd. Based on factual point-of-sale information and representative of only general market statistics. All other comments, opinions and references made are not those of GfK. Notes: (1) England, Scotland and Wales only (excludes Northern Ireland); (2) based on GfK’s coverage of 90% of the market, numbers have been extrapolated to represent the full market; (2) only includes sales through consumer channels, therefore excludes most business connections; (4) excludes contract renewals

Mobile broadband can be a complement to, or a substitute for, fixed-line broadband

Seventy-five per cent of those with a mobile broadband connection also have a fixed-line connection, indicating that the two services are complementary, serving different purposes (i.e. a fixed-line connection is used in the home, and a mobile broadband connection is used when out and about). This is likely to be a result of constraints associated with the speed and capacity of mobile broadband, making it less appropriate for in-home use where users may be more inclined to use data-hungry services such as the BBC’s iPlayer.34

Figure 4.12 indicates how mobile broadband take-up varies by several key socio- demographic factors. It is clear that not only is there considerable variation among mobile broadband users, but there are also very different usage profiles: for some socio- demographic groups mobile broadband is an alternative to fixed-line broadband, for others it is used in addition to fixed-line broadband.

Mobile broadband take-up is highest among the more affluent social groups, with nearly one in five adults in the socio-economic group AB having a connection, compared to less than one in ten in social groups C2DE. However, the large majority of AB mobile broadband users also have a fixed-line broadband connection. Conversely, while a lower proportion of people in socio-economic group DE have a mobile broadband connection, they are much more likely to use it as their only broadband connection. This is likely to be related to affordability: a much larger proportion of mobile-only households are within lower socio-economic groups (in Q1 2009, 23% of DE households were mobile-only, compared to 8% of ABC1 households), and mobile broadband offers consumers the opportunity to get online without having to pay a monthly line rental, which is required for most fixed-line broadband services. The availability of pre-pay mobile broadband may also be driving further take-up among less

34 The majority of mobile broadband tariffs include less than 3GB of data per month (although there are exceptions, such as 3UK’s 15GB for £15 tariff), while research by Epitiro (www.epitiro.com/news/epitiro-publishes-uk-mobile-broadband-research.html) has found that average mobile broadband speeds are less than 1Mbit/s – compared to average fixed-line broadband speeds of around 4.1Mbit/s (see Ofcom’s UK Broadband Speeds 2009, www.ofcom.org.uk/research/telecoms/reports/broadband_speeds/broadband_speeds/

207 affluent consumers, as it enables users to control their spend without committing to a monthly line rental, and does not require a credit check.

Those living in privately rented properties are much more likely than owner-occupiers to have mobile broadband as their only broadband connection. This is likely to reflect the fact that while fixed-line broadband is typically a household purchase, as most households have only one telephone line and wireless routers enable multiple PCs to use the same broadband connection, mobile broadband is more likely to be an individual purchase as it is more suited to use by a single computer and an individual can take it with them wherever they go. Those living in shared accommodation or in short-term lets are therefore less likely to invest in a fixed-line broadband contract. Students and young professionals frequently live in shared accommodation, and this, combined with the typical profile of a technical service still in its early stages of take-up, may explain why younger people are more likely to have a mobile broadband connection than older age groups.

Figure 4.12 Take-up of mobile broadband

% take-up Age Socio-economic group Housing 20 3 Mobile 15 6 broadband only 5 4 3 8 10 3 3 Fixed and 1 16 mobile 2 3 12 4 broadband 5 10 11 10 9 8 9 8 6 6 3 4 0 l l 4 a Al 2 34 54 74 ge - 75+ AB C1 C2 DE ci tga o 15- 25 35- 55-64 65- r private - mo Rent - s wn / Rent O Source: Ofcom research, Q1 2009 Base: All adults aged 15+ (n = 6,090)

4.1.6 Smartphones and applications drive more sophisticated use of mobile internet

More than eight million people use the internet on their mobile phones

In the 2007 Communications Market report we highlighted that conditions were in place for the take-off of the internet on mobile phones. Networks supporting 3G were widely available, the majority of mobile handsets had internet capability, operators were launching ‘unlimited’ data tariffs and the customer experience began to approach that of the fixed-line internet as website providers increasingly provided mobile-enhanced versions of their sites.

Two years on, it is apparent that although the use of internet services on mobile phones has grown considerably, the ‘mobile internet’ has still not reached majority of mobile phone users. According to data from the Nielsen Company, over 8 million people in the UK (16% of adults) accessed the internet on their mobile phone at least once in the first quarter of 2009, up 40% on a year previously (Figure 4.13). However, this has only in part been driven by consumers’ desires to replicate and re-package the PC-based internet experience on a mobile phone. More fundamentally, the evolution of ‘smartphones’ (mobile phones with

208 advanced capabilities and large processing power35) has enabled the delivery of internet services and applications specifically tailored to the needs of mobile consumers.

Figure 4.13 Growth of UK mobile internet users

9 8.1 8.1 8 7.5 7 5.7 6.0

(millions) 6

5 4 Audience 3 2

Unique 1 0 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009

Source: The Nielsen Company Note: Data before Q1 2008 is not available

Increasing take-up of smartphones drives internet usage

In the four years between Q1 2005 and Q1 2009 quarterly smartphone sales rose from 173,000 to 1.23 million, peaking at 1.24 million units in Q3 2007 when Apple launched the iPhone 3G, and Mobile Today reported initial UK sales of 50,000 units a week36. During this period smartphone sales as a proportion of all handset sales rose from 3.7% to 15.6%. The increase in the sales of smartphones comes in the context of falling overall handset sales: in Q1 2009, smartphone sales increased by 3% on the previous quarter and by 26% on Q1 2008, despite overall handsets sales falling by 19% on the previous quarter and by 3% on Q1 2008 (Figure 4.14).

35 There is no agreed definition of ‘smartphone’ since it is a constantly evolving technology, but here a smartphone is defined as a handset running Symbian (6.1 and above), Android, Blackberry, iPhone, Palm, Windows Mobile or Linux operating systems. 36 Mobile Today, “3G iPhone hits 50,000 sales per week”, http://www.mobiletoday.co.uk/3G_iPhone_50000_sales_per_week.html

209 Figure 4.14 UK smartphone sales

15.6 1.6 14.8 16 1.4 14 12.0 12.2 11.6 11.4 Smartphone 1.2 10.4 12 unit sales 1.24 9.1 1.23 1.0 8.6 1.19 10 0.8 7.3 6.9 6.9 7.1 8 6.4 6.4 6.4 0.97 0.91 sales Smartphone 0.84 0.83

0.6 0.78 6 sales as a 3.7 proportion of 0.60 0.4 0.59 4 0.56 0.50 0.50 total handset 0.49 0.2 0.46 2 sales 0.29 Smartphones as % as % of handset Smartphones .17 Smartphone unit sales (millions) sales unit Smartphone 0.0 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 20052006 2007 2008 2009 Source: GfK Retail and Technology Ltd, based on factual point-of-sale information Notes: Smartphones are defined as any handset running Symbian (6.1 and above), Android, Blackberry, iPhone, Palm, Windows Mobile or Linux operating systems; England, Scotland and Wales only (excludes Northern Ireland); based on GfK’s coverage of 94% of the market - data have been extrapolated to represent whole market; only represents sales through consumer channels (i.e. most business connections are excluded.

The take-up of smartphones is an important driver of the take-up of internet services on mobile phones. A comScore survey in January 2009 revealed that smartphone users are more than twice as likely to access news or information via a browser on their mobile phone than mobile phone users overall, and almost four times more likely to access news or information via a downloaded application. However, the fact that the majority of smartphone users do not use their phones for internet services indicates that many people are not using the functionality available. Among iPhone users, 80% accessed browser services and more than half used downloaded applications to access information (Figure 4.15).

Figure 4.15 Use of advanced services by iPhone and smartphone users

100 80 75 iPhone 80 Users 56 55 56 55 60 48 All 35 40 30 32 smartphone 26 20 22 Users 20 13 13 12 6 9 All mobile users

Proportion of usersProportion (per cent) 0 Accessed Accessed e- Ac cess ed Accessed social Accessed Us ed web information mail information networking site weather search using browser using downloaded application Source: comScore Mobile, January 2009 Base: UK population aged 13+ (n=1500)

Launch of application stores heralds a new era for the ‘mobile internet’

In the past year, the growing use of applications (or ‘apps’) on mobile phones in the UK and worldwide has changed the way in which consumers use data services on mobile handsets. This in turn is changing the relationships between operators, handset manufacturers and

210 software providers, and has offered further differentiation between the ‘fixed-line’ and ‘mobile-enabled’ internet.

Current mobile phone applications differentiate themselves from those previously available on mobile devices by using the higher data speeds on offer from 3G connections and by harnessing the new capabilities of today’s smartphones, such as touch-screen, accelerometer (sensing motion and orientation) and GPS capabilities.

What is a mobile application? A mobile application (or app) is a computer programme which runs on a mobile handset. Mobile ‘apps’ have existed for as long as there have been smartphones, but the complexity of applications has been limited by the handset’s memory and processing power. In the last five years many handsets have had the ability to run simple mobile applications, but until recently ‘apps’ have not had a great impact on the mobile phone industry.

‘Apps’ exist across many genres, including games, entertainment, utilities, education, travel and lifestyle. Furthermore, they vary in the degree to which they rely on the capabilities of the handset they run on and the network they are connected to. For example, many games can run independently of data connectivity, while other utilities and travel applications can either take advantage of GPS built into handsets, or use location-based information provided by the mobile network operator.

Examples of applications from Apple’s All-Time Top Free Apps37 include: Facebook – an application which accesses the popular social networking site; Urbanspoon – a travel application which recommends restaurants in your local area; Shazam – a music application which identifies songs using the phone’s microphone; and Remote – an entertainment utility which can control the iTunes media player on a remote computer from an iPhone or iPod Touch.

It was arguably the launch of Apple’s App Store, concurrently with the iPhone 3G in July 2008, which brought ‘apps’ to mainstream attention and since then competing operating system (OS) designers and handset manufacturers have announced, or launched, their own application marketplaces (online shops accessible from an internet browser or through the handset). The Open Handset Alliance and its operating system Android (initially developed by Google) launched the Android Marketplace in October 2008, while Microsoft has announced that it will consolidate existing third-party offerings for its Windows Mobile platform as the Windows Marketplace for Mobile in the second half of 2009.

Handset manufacturers Samsung, Nokia, Palm, and RIM (which manufactures the BlackBerry) all launched application marketplaces in the first half of 2009, while Sony Ericsson has announced that it will accept submissions for applications for its existing games and media service from July 2009 (Figure 4.16).

37 Apple, “Thanks a billion”, http://www.apple.com/itunes/billion-app-countdown/

211 Figure 4.16 Launch dates of mobile phone application stores

Launch date Organisation Applications market

July 2008 Apple App Store

October 2008 Open Handset Alliance Android Market

January 2009 Samsung Samsung Mobile Applications

April 2009 RIM BlackBerry App World

May 2009 Nokia Ovi

June 2009 Palm App Catalog

Due Q2 2009 LG TBC

Due Q3 2009 Sony Ericsson Playnow Arena

Due H2 2009 Microsoft Windows Marketplace for Mobile

Source: Ofcom, June 2009

The rapid proliferation in both the number of mobile ‘apps’ available, and the variety of functions that they perform, provides evidence of a rapid shift in the way in which consumers use data services on mobile phones. Handset manufacturers and mobile OS designers have released tools and resources that allow both professional and ‘bedroom’ developers to create and publish applications. For example, Apple’s App Store grew from 556 applications and games in July 2008 to more than 65,000 a year later (Figure 4.17). Furthermore, the functionality of applications available on the iPhone has been a large focus of Apple’s advertising for the handset, with a number of television and newspaper campaigns having highlighted ‘apps’ ahead of the handset itself.

Figure 4.17 Number of ‘apps’ available at Apple’s US App Store 60 50.7

9.5 40 30.3 Games 6.0 Other Apps 20 41.2 13.5 3.0 24.2

Number of apps (000’s) Number 4.7 1.1 10.5 0 3.6 Q3 Q4 Q1 2008 Q2 Source: 148apps.biz, June 2009 Note: Data for the UK App Store are unavailable. However most ‘apps’ are sold in both the UK and the US app stores and so in terms of the number and types of application available the UK app store is similar but not identical to the US app store. Apple announced on July 14, one year after launch, that the App Store had more than 65,000 applications available.

Mobile operators face challenges as they look to monetise the increasing use of mobile applications, with revenues typically split between the developer and the application store provider, and the mobile operator playing no part in the transaction other than to carry the data. In response to this, mobile network operators are developing their own ‘open-API’ (application programming interface) initiatives to compete with the application stores offered by handset manufacturers. Network APIs allow developers to access intelligence from

212 mobile network operators (such as cell-ID location information or customer preferences) and incorporate this information into mobile applications.

Two ‘open-API’ initiatives are O2’s Litmus (currently in testing beta stage of development) and Joint Innovation Lab (a joint venture between Vodafone, Verizon Wireless, China Mobile and Softbank Mobile). Applications from Litmus can use O2’s APIs to retrieve information about a handset’s location, compatibility and connections status, and may soon enable users to make purchases using SMS short codes. A key feature of the Joint Innovation Lab platform is direct billing, which will enable developers to offer ‘in-app’ purchases, billed via the customer’s mobile phone bill, and from which mobile network operators will be able to take a revenue cut.

Young and upwardly-mobile

Young people are much more likely than older people to use internet services on their mobile phones; according to the Nielsen Company, 15-24 year olds accounted for 25% of ‘mobile internet’ users (compared to 16% of PC internet users). Similarly, according to research commissioned by mobileSQUARED earlier this year, more than half of 18-24 year- olds are aware of what an application store is, compared to less than a quarter of the population as a whole. With men more than twice as likely as women to be aware of mobile applications, they have some way to go before they enter the consumer mainstream (Figure 4.18).

Figure 4.18 Application stores: public awareness

52 45 20 35 30 24 15 18

Proportion of individuals (%) of individuals Proportion 0 All Male Female Aged 18-24 Aged 25-34 Aged 35-44 Aged 45-54 Source: mobileSQUARED/Lightspeed Research, March 2009

4.1.7 Low-price post-pay plans drive growth in contract subscriptions

The number of pay-as-you-go connections falls for the first time as consumers migrate to pay-monthly...

Although the majority of mobile connections continue to be pre-pay (pay-as-you-go), a characteristic of the mobile market in 2008 was the growth in post-pay (pay-monthly) tariffs. During the year, the number of post-pay subscriptions grew by over 3 million, while the number of pre-pay subscriptions fell by 109,000 (Figure 4.19).

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Figure 4.19 Market share of post-pay and pre-pay subscriptions

60.0 65.8 70.1 73.8 76.8 Total connections (millions) 100%

80% 66% 66% 65% 64% 61% 60% Prepay

40% Postpay 20% 34% 34% 35% 36% 39% %share of total connections 0% 2004 2005 2006 2007 2008

Source: Ofcom

...driven by the availability of low-cost SIM-only deals

This shift from pre-pay to post-pay has in part been driven by the availability of low-cost (sub-£20) 'SIM-only' tariffs, in which customers are not given a new handset when signing up for a new contract, but are supplied only with a SIM card which they can use in a handset they already own. Figure 4.20 below shows that in every month since September 2008 more than a fifth of new post-pay (pay-monthly) connections have been sold on a SIM-only basis. It should be noted that this data excludes both contract renewals (i.e. when a consumer renews, upgrades or downgrades a contract with the same operator) and online sales through mobile operators’ own websites, and as these channels are known to promote SIM- only contracts, it is likely that the actual proportion of SIM-only contracts is significantly higher.

Figure 4.20 SIM-only contracts, as a proportion of all post-pay mobile contracts

100%

80%

Handset 77.1 74.5 75.8 76.3 73.6 75.7 77.6 78.1 78.3 60% 86.1 82.3 84.1 82.0 82.0 83.2 80.4 included

40%

SIM only 20% 22.9 25.5 24.2 23.7 26.4 24.3 22.4 17.7 15.9 18.0 18.0 16.8 19.6 21.9 21.7

Proportion ofProportion (per sales cent) 13.9 0% Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- 08 08 08 08 08 08 08 08 08 08 08 09 09 09 09 09

Source: GfK Retail and Technology Ltd Notes: England, Scotland and Wales only (excludes Northern Ireland); based on GfK’s coverage of 94% of the market, numbers have been extrapolated to represent the full market; only includes sales through consumer channels, therefore excludes most business connections; excludes contract renewals

Operators benefit from SIM-only contracts through reduced customer acquisition costs (they pay less commission to retailers, as no handset is sold) and reduced handset subsidies. In addition, SIM-only tariffs offer a way to migrate customers from pre-pay to post-pay contracts by offering low-cost monthly tariffs; this decreases churn and can potentially increase average monthly spend. For consumers, SIM-only tariffs are attractive to those seeking

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additional value in terms of price-per-minute or price-per-text, compared to pay-as-you-go services or post-pay contracts which include a handset. Furthermore, as most people already have mobile phones, many do not want a new handset (70% of respondents in our recession questionnaire did not want to upgrade their handset).

O2 spearheaded the roll-out of 30-day rolling SIM-only contracts with the launch of the Simplicity tariff in July 2007. Initially, take-up of O2’s SIM-only tariff was slow, accounting for just 2% of O2’s mobile subscriptions in Q1 2008, but throughout 2008 the Simplicity tariffs rapidly gained market share, and accounted for a third of O2’s total post-pay customer base by Q1 2009.38 Other operators were quick to follow, with 3UK the last mobile network operator to enter the market, launching its first SIM-only deal in February 2009.

Virgin Mobile offered the highest-priced SIM-only contract in July 2009 at £35 for a 30-day contract, with 1000 anytime minutes and unlimited texts. At the other end of the scale, in June 3UK introduced Sim Zero, the first no-cost SIM-only deal in the UK with free Skype-to- Skype calls, instant messaging and voicemail for no monthly outlay. The comparative value offered by SIM-only contracts is detailed in Figure 4.21, which illustrates that for a monthly fee of £15, consumers can get 300 minutes and unlimited texts on a SIM-only contract. (As a point of comparison, on average each mobile connection in 2008 used 123 minutes and 99 texts per month.)

Figure 4.21 Inclusive any-network, anytime allowances in 30-day £15 SIM-only and standard contracts

Vodafone O2 T-Mobile Orange 3UK 600

500

400 Unlimited Unlimited

Unlimited Te xt s Unlimited - time inclusive Unlimited 300 500 Unlimited Minutes calls / calls texts 200 350 300 300 300 300 100 125 - network, any 100 200 Any 100 100 100 75 0 olny olny olny olny olny - - - - - Sim Sim Sim Sim Sim Withhandset Withhandset Withhandset Withhandset Withhandset

Source: Ofcom/tariff data from Pure Pricing/Operator websites Notes: Data based on tariffs available in July 2009; standard tariff with basic handset selected which offers highest number of anytime, any-network minutes for £15 where available on an 18-month contract (Orange £19.68, O2 £19.58); SIM-only tariff selected with highest number of anytime minutes at £15; this table is indicative of inclusive anytime, any network minutes only (and texts when they are additional to the maximum number of minutes) and should not be used to compare overall pricing as many additional factors are excluded, such as handset included, on-net calls, off-net calls, off-peak calls, data bundles and metered pricing

Lower price contracts gain market share

Although SIM-only deals have established themselves within the tariff portfolio of every network operator, the majority of new contracts still include a handset, and among these

38 Telecoms Europe, 26 May 2009, http://www.telecomseurope.net/content/overwhelmed-sim-only-o2- demands-handset-innovation

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contracts there has been a significant shift towards lower price monthly fees. Figure 4.22 below shows that in Q1 2009 32% of new pay-monthly contracts cost £20 per month or less, compared to 23% in Q1 2008 and just 5% in Q1 2006. The proportion of new connections with contract plans at under £30 per month has more than doubled over the two years to March 2009, to 49%.

Including a handset within a mobile tariff increases the costs to the operator, but these can be offset by securing a longer contract commitment, and potentially by the increased revenue potential offered from handsets with features designed to stimulate demand for mobile data services. It was in this context that in December 2008 3UK undercut many of the SIM-only contracts in the market with the launch of a £9 per month tariff which included 100 minutes or texts (or any mix of the two) and a free Sony Ericsson K660i HSDPA-enabled handset with 2.0 megapixel camera, on an 18-month contract. In February 2009 Virgin Mobile launched an £8.50 per month 18-month contract with 100 minutes and 100 texts and a choice of either the 3G Nokia 3120 or the Samsung G600 handset with a 5 megapixel camera. In July 2009, the lowest cost tariff available with a handset included was Orange’s £5/month tariff which includes a Nokia handset, 50 minutes and 50 texts – but this tariff is also the UK’s first 36-month contract (a new handset is offered at 18 months).

At the other end of the scale, new connections with a monthly fee of £50 a month or more accounted for less than 1% of sales in March 2009, compared to a peak of 9% in Q2 2006. The most common price range for monthly contracts has been between £35 and £39.99 since Q2 2006. In Q1 2009 one in four (26%) of new connections were within this price range, although this has fallen from a high of nearly half of all connections two years ago, as lower-value tariffs have gained in popularity.

Figure 4.22 Monthly line rental for new mobile contract connections

100% 7 8 8 8 7 6 4 4 7 6 4 3 2 2 9 12 11 10 13 9 10 11 11 14 9 9 12 12 13 12 14 11 80% 2 8 £50+ 10 11 26 22 35 32 30 29 £40-49.99 28 40 48 40 60% 44 37 46 43 £35- 39.99 44 14 45 39 8 11 14 11 £30-34.99 40% 29 6 17 25 10 18 £20-29,99 21 21 15 20 20 19 10 20 £15-19.99 20% 31 22 21 20 19 23 24 20 22 18 17 20 £0-14.99 Proportion of contracts (%) 17 19 19 12 16 5 4 5 9 12 0% 42 4 2 2 42 41 31 30 50 50 0 6 7 6 7 7 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2005 2006 2007 2008 2009

Source: GfK Retail and Technology Ltd, based on factual point-of-sale information Notes: England, Scotland and Wales only (excludes Northern Ireland) based on GfK’s coverage of 94% of the market; based on new post-pay connections; excludes contract renewals; only represents sales through consumer channels (i.e. most business connections are excluded)

The long and the short of mobile contracts

These two trends in the market – the emergence of SIM-only and low-cost contracts with handsets included – are evident in a polarisation of contract lengths. In the middle of 2007, virtually every contract sold was for either 12 or 18 months. However, by Q1 2009 24% of contracts were sold on 30-day contracts (these are overwhelmingly SIM-only deals), while 13% of contracts locked in consumers for a 24-month period (Figure 4.23). Some of these longer contracts are the product of lower-price contracts, which mean that operators need to recover the cost of contract subsidies over a longer period of time. However, 24-month terms

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are becoming increasingly common for higher priced contracts in order to subsidise high-end smartphones such as the iPhone, which is sold by O2 predominantly on 24-month contracts.

Figure 4.23 Length of new mobile contract connections

100% 3 5 12 12 7 13 24 80% 41 Others 55 66 24 MONTHS 74 68 67 63 60% 80 84 82 75 72 60 18 MONTHS 88 88 12 MONTHS 40% 76 72 1 MONTH 58 5 3 44 12 8 20% 33 11 13 25 24 24 19 16 15 13 15 19

Proportion of sales (per cent) 10 0% 2 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2008 Q2 Q3 Q4 Q1 2005 2006 2007 Q1 2009

Source: GfK Retail and Technology Ltd Notes: England, Scotland and Wales only (excludes Northern Ireland); based on GfK’s coverage of 94% of the consumer market; based on new post-pay connections; excludes contract renewals; only represents sales through consumer channels (i.e. most business connections are excluded)

4.1.8 A new era for MVNOs

New MVNOs gain market share

By securing a wholesale agreement with one of the five mobile network operators (MNOs), Mobile Virtual Network Operators (MVNOs) and service providers (SPs) are able to offer telephony services without having a spectrum allocation or their own wireless network. Virgin Mobile was the world’s first MVNO when it launched in the UK in 1999 (initially as a joint venture between T-Mobile and the Virgin Group), and it has remained the largest UK MVNO. However, during 2008, for the first time, the combined market share of the UK’s other MVNOs and SPs exceeded that of Virgin Mobile, following a spate of new MVNO launches during 2007 and 2008.

Mobile network operators (MNOs) An MNO has its own allocation of licensed spectrum and uses this to provide mobile telephony services over its own wireless network. There are five MNOs in the UK: 3, O2, Orange, T-Mobile and Vodafone.

Mobile virtual network operators (MVNOs) An MVNO provides mobile telephony services to customers but does not have its own allocation of spectrum or its own wireless network. It does this by agreeing wholesale deals with MNOs enabling it to use their spectrum and network. Virgin Mobile is the UK’s largest MVNO.

Mobile service providers (SPs) An SP is similar to an MVNO in that it does not have its own allocation of spectrum or its own wireless network. In addition, an SP does not have its own switching infrastructure, so uses the MNO’s own interconnect agreements (interconnection agreements are necessary to ensure that a call from one network can be received by a consumer using a different network).

217

At the end of 2008, the total share of connections held by alternative providers to the five mobile network operators held steady at just under 13% (unchanged from 2007), but the share of MVNOs and SPs other than Virgin rose from 5.9% to 6.5% (Figure 4.24).

Figure 4.24 Operator and MVNO/service provider market share of subscribers

60.0 65.8 70.1 73.8 76.8 Total connections (millions) 100% 4.3% 5.0% 5.5% 5.9% 6.5% 6.5% 6.6% 7.6% 7.0% 6.2% 80%

60% MVNO/Service Providers Virgin 89.3% 88.4% 40% 86.9% 87.1% 87.3% Mobile operators

Share of subscriptions 20%

0% 2004 2005 2006 2007 2008 Source: Ofcom

Different business models emerge

The decline in Virgin Mobile’s market share reflected the company’s change in focus away from low-value pre-pay consumers and towards increasing retention and average revenue per user by concentrating on the post-pay market and bundling its mobile services with Virgin Media’s broadband and TV offerings.

However, the growth of other MVNOs and SPs represents a shift in the market, which comes from MNOs increasingly looking to secure wholesale agreements in order to boost revenues, and a range of new virtual operators responding by launching services targeting specific customer segments.

• A significant proportion of MVNO subscription growth in 2008 originated from providers offering low-cost international calls to customers from ethnic and immigrant groups. For example, Lebara Mobile, operating on Vodafone’s network, claimed to have over a million total acquired subscribers in the UK by May 2009 (note this is total acquired and not active connections). • Blyk, an advertising-funded MVNO operating on Orange, targeting under 24-year olds and offering free calls in return for receiving adverts, reported 200,000 subscribers in September 2008, one year after launching in the UK. However, on 27 July 2009, Blyk announced it would accept no more customers and will end its MVNO service in the UK on 26 August 2009. Orange, in partnership with Blyk, is planning to launch its own ad-funded calls and text service using its own brand name in August this year.39 • Supermarket-backed MVNOs have also performed well. Tesco Mobile (using the O2 network), is the UK’s second largest MVNO after Virgin Mobile, and achieved nearly 2 million mobile connections towards the end of 2008. In April 2009 Tesco announced a renewed focus on its telecoms business, increasing its telecoms outlet stores (standalone outlets within larger Tesco stores) from 41 to 100. Meanwhile,

39 New Media Age, 27 July 2009, http://www.nma.co.uk/

218 Asda Mobile (operated by the Caudwell Group) claimed in June 2009 that the success of budget handsets, retailing at under £10, contributed to a 10% increase in pre-pay sales over the last year.  MVNOs are also beginning to move into mobile broadband. In May 2009 BT Retail launched a combined mobile broadband and fixed-line broadband tariff at £15.65 per month. The deal mirrors a similar offer launched by Virgin Media, in which users pay £5 per month for a 1GB mobile broadband connection when they also take a fixed- line broadband service.

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4.2 The telecoms industry

4.2.1 Introduction

In this section of the report we look at the major trends in the UK telecommunications market from an industry-wide and operator perspective. Sections 4.2.2 to 4.2.5 look at the industry overall and Section 4.2.6 looks specifically at business markets.

The key findings from this section of the report are as follows:

 Overall industry growth stalls. Operator-reported retail telecoms revenues grew by just £117m in nominal terms in 2008 to £31.0billion – representing a considerable slowdown from the £1.2bn growth recorded in 2007. A small fall in wholesale revenues meant that overall operator-reported revenues were unchanged in 2007 and 2008 (page 198).

 In 2008 O2 became the largest telecoms network in terms of connections. During 2008 O2 (including Tesco Mobile) overtook BT to become the UK’s largest provider of telecoms connections; at the end of 2008 there were 21.5 million active O2 (and Tesco Mobile) subscriptions, compared to 20.6 million BT lines and integrated services digital network (ISDN) channels (page 224).

 44.5% of all call minutes originated on mobile phones in 2008. If current trends continue mobile call minutes are set to overtake fixed-line in 2010 (page 224).

 BT’s retail share of call volumes from landlines to UK geographic numbers fell to under 50% for the first time in 2008. BT’s retail market share has suffered as a result of increasing consumer use of wholesale line rental (WLR) and local loop unbundling (LLU)-based telephony services (page 227).

 Falling prices hit broadband revenues. While the total number of residential broadband connections increased by 11.4% to 15.9 million during 2008, revenues from these services grew by just 3.8% as prices continued to decline (page 234).

 Operator-reported spend on business telecoms services grew by 2% in 2008. Business spend on telecoms services grew to £13.9bn in 2008, as the decline in fixed voice revenues was offset by an increase in business mobile revenues. Revenues from business internet and corporate data services were unchanged during the year (page 236).

4.2.2 Industry overview

The Office for National Statistics (ONS) calculated that total UK telecoms turnover was £62.2bn40 in 2008, a 1.7% increase on the £61.1bn it reported for 2007 (Figure 4.25).

This figure is significantly greater than the £39.5bn reported by telecoms providers to Ofcom, as the ONS includes turnover from activities in markets not regulated by Ofcom, for example, network and hardware provision, installation and maintenance. The data which we collect cover revenues from fixed and mobile telephony and internet services, along with the wholesale revenues associated with the provision of these services.

40 http://www.statistics.gov.uk/STATBASE/tsdataset.asp?vlnk=4702&More=Y

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Our own figures suggest that for the first time since former telecoms regulator Oftel started to collect market data in 1992/93, operator-reported revenues from telecoms services did not increase in 2008. Total operator-reported revenues were unchanged in 2008 at £39.5bn as a result of declining wholesale revenues (which fell by 1.4% to £8.5bn due to falling fixed interconnection revenues); retail service revenues increased by 0.4% to £31.0bn during the year.

Figure 4.25 UK telecoms industry turnover

80 2008 5 year 61.1 62.2 growth CAGR 60 56.4 56.7 50.8 53.3 21.6 22.7 16.5 19.0 18.5 40 16.5 Other 5.0% 6.6% revenue

Turnover (£bn) Turnover 20 39.5 39.5 34.3 36.8 37.4 38.2 Operator- -0.0% 2.8% reported service 0 revenues 2003 2004 2005 2006 2007 2008

Source: Ofcom / ONS / operators Note: Includes estimates where Ofcom does not receive data from operators

Fixed voice revenues continued to decline in 2008...

The main factor behind the slowdown in retail revenue growth in 2008 was the continued decline in revenue generated by fixed-voice telephony services (Figure 4.26). This fell by 2.9% to £9.0bn in 2008, mainly due to falling use per line, but also as a result of a reduction in the number of fixed lines (see section 4.2.3). Over the five years to 2008 the average drop in fixed-line revenues was 4.3%, suggesting that the decline in fixed revenues is slowing.

Figure 4.26 UK telecoms industry retail revenue

2008 5 year 30.9 31.0 growth CAGR 29.0 29.7 30 28.0 3.2 3.2 25.8 3.1 3.1 2.9 3.3 3.4 Corporate 1.5% 3.3% 2.8 2.6 3.0 3.3 data services 2.1 20 Internet & 0.1% 9.4% 11.9 13.1 13.8 15.0 15.4 9.7 broadband

10 Mobile voice 2.2% 9.6% Retail revenue revenue Retail (£bn) & data 11.2 10.6 9.9 9.4 9.3 9.0 0 Fixed calls & -2.9% -4.3% access 2003 2004 2005 2006 2007 2008 Source: Ofcom / operators / IDC

...while mobile voice revenue growth slowed significantly

Looking at the industry as a whole, a key difference between 2008 and the previous five years was that growth in operator-reported revenues from mobile and internet services was barely able to offset the decline in fixed telephony revenue (Figure 4.27). Although revenues from mobile telephony, internet and broadband and corporate data services (CDS) all increased in 2008, they went up by just £383m (compared to an increase of £1.3bn in 2007). Retail revenue from fixed-line voice services fell by £266m in 2008, meaning that total

222 operator-reported retail revenues increased by £117m during the year, compared to £1.2bn in 2007.

Figure 4.27 Growth in operator-reported retail telecoms revenues in 2008

Key drivers Increasing use of Growing use of Migration to Falling non-messaging web-hosting and broadband & connections and data services IP VPN services falling prices declining usage

£4m £49m

-£266m £331m

£117m

Mobile Corporate data Internet & Fixed voice Total services broadband

Source: Ofcom / operators / IDC

Growth in internet and mobile continued, while the number of landlines fell

The decline in the fixed telephony market is reflected in Figure 4.28, which shows that the total number of fixed lines fell by 0.6% (0.2m) to 33.2m in 2008, a faster rate than in 2007. At the same time the numbers of mobile subscriptions and internet connections both increased, mobile by 4.1% and internet by 2.8%. These figures are both higher than the respective rates of revenue growth for each service, indicating that average spend per connection fell during the year.

The total number of residential and SME broadband connections grew by 10.7% in 2008, down from 19.9% in 2007 and significantly lower than the average annual growth of 40.9% in the five years to December 2008. This slowdown comes in the context of almost two-thirds of households in the UK having a fixed broadband connection in Q1 2009.

Figure 4.28 Total telecoms connections

80 76.8 ) 70.1 73.8 2008 5 year m 65.8 growth CAGR ( s 60.0 n o60 52.9 ti Mobile 4.1% 7.8% p ri subscriptions c s b 34.9 34.5 u40 34.0 33.5 33.5 33.2 Fixed lines -0.6% -1.0% /s s n 19.2 o 17.5 18.7 ti 13.5 15.3 16.3 c20 Total internet 2.8% 7.3% e n 15.6 17.3 subscriptions n 3.1 6.1 13.0 o 9.9 C 0 Of which 10.7% 40.9% 2003 2004 2005 2006 2007 2008 broadband

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators; broadband excludes corporate connections

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O2 overtook BT to become the UK’s largest provider in terms of connections

The year to December 2008 was also the first in which a mobile operator was the largest UK telecoms provider in terms of connections (Figure 4.29). During the year O2 overtook BT and by the end of the year had 21.5m subscriptions (19.5% of the total) compared to BT’s 20.6m analogue lines and integrated services digital network (ISDN) channels (an 18.7% share). At the end of 2008 mobile subscriptions accounted for 69.8% of total telecoms connections, up from 68.8% in 2007 and 60.0% in 2003.

Figure 4.29 Share of total UK fixed and mobile telecoms connections

%age point change One year Five years 100% 2.1 2.2 3.7 3.5 5.4 6.2 7.3 15.5 3.7 3.7 4.1 Other 1.1 5.3 15.0 14.9 80% 14.8 14.6 14.9 14.9 3UK 0.4 4.1 15.4 15.3 16.3 16.1 15.2 Orange 0.3 -0.6 60% 15.0 15.6 17.0 18.4 18.7 19.5 T-Mobile -0.9 0.3 14.5 14.8 40% 15.2 5.3 5.0 14.5 15.6 O2 0.8 4.5 4.5 16.1 4.2 4.2 20% 4.2 Vodafone 0.4 1.6 32.7 29.3 25.9 22.7 20.7 18.7 Proportion of connections (%) Cable -0.0 -1.1 0% 2003 2004 2005 2006 2007 2008 BT -2.1 -14.0

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators; ‘Other’ includes carrier pre-selection and wholesale line rental in additional to fixed other licensed operators

Mobile-originated voice call volumes likely to overtake fixed in 2010

The increasing importance of mobile telephony to the overall telecoms market is also shown in Figure 4.30, which shows the market share of total voice telephony call volumes. In 2008 the proportion of voice calls originating on mobile networks increased by 3.9 percentage points to 44.5%, mainly at the expense of BT (whose share declined by 3.7 percentage points to 25.7%), although other providers also saw a decline. The same pattern was evident in the five-year period to December 2008, with mobile gaining market share at the expense of fixed operators. If current trends continue, mobile-originated voice call volumes should overtake those from fixed lines in 2010.

Figure 4.30 Share of total outbound voice call volumes

100% %age point change 26.1 28.2 30.9 35.7 80% 40.5 44.5 One year Five years

Mobile 3.9 18.4 60% 31.1 32.1 33.9 32.3 30.1 29.8 40% Other fixed -0.2 -1.2

20% 42.9 39.7 35.1 32.0 29.4 25.7 BT -3.7 -17.2 Proportion of connections (%) 0% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators

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4.2.3 Fixed voice telephony

Decline in revenues continued in 2008

Revenues from fixed voice services continued to fall in 2008, when they generated £9.0bn, 2.9% lower than in the previous year and 19.6% lower than they had done five years previously. Fixed telephony tariffs are increasingly aligning themselves with those of mobile services, in that many now also include an element of inclusive calls within the monthly rental fee. For example, BT’s most basic line rental package includes free weekend calls to UK geographic, 0845 and 0870 numbers (and free evening calls to UK geographic numbers for those on to a rolling 12-month contract), while Virgin Media’s M tariff (available to customers taking bundled services) includes free weekend landline calls. This is reflected in Figure 4.31, which shows that while total voice call revenues declined by an average of 8.1% a year between 2003 and 2008, access revenue growth averaged 0.4% a year.

Figure 4.31 Fixed voice telecoms revenue

2008 5 year 15 growth CAGR

11.2 Total calls -6.7% -8.1% 10.6 1.4 9.9 9.4 10 1.4 9.3 9.0 Other voice -13.5% -10.4% 1.2 2.1 1.0 0.9 0.8 calls 2.0 1.8 0.8 1.7 1.7 1.6 Calls to mobiles -6.1% -5.7% 0.7 0.6 0.6 0.6 0.6 2.4 5 2.0 1.7 1.6 1.5 1.4

Revenue (£bn) International -0.4% -5.3% calls 4.6 4.6 4.5 4.5 4.7 4.7 UK geographic -5.5% -10.2% calls 0 Access 1.0% 0.4% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators

Access made up the majority of average fixed voice spend in 2008 for the first time

The effect of this shift is also evident in Figure 4.32, which shows that while average monthly spend on access (i.e. line rental and inclusive calls) increased in each of the five years to 2008, there was a downward trend in call spend in each year. Total average spend per month fell by 71p (3.0%) to £22.79 in 2008 as a result of average rental revenue increasing by 16p a month to £11.73 and average call revenue falling by 7.3% to £11.06. This made 2008 the first year in which access revenues made up the majority of average fixed-line voice revenue. Average fixed-line voice spend fell by 19.9% (£5.68) in the five years from 2003 to 2008 as a result of falling use, prices and lines.

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Figure 4.32 Average monthly voice revenue per fixed line

£28.47 30 £26.84 £25.11 £24.13 2008 5 year £23.50 £22.79 growth CAGR

20 17.51 15.86 14.04 12.93 11.93 11.06 Calls -7.3% -8.8%

10 Access 1.4% 1.4% Revenue per month (£) month per Revenue 10.96 10.98 11.06 11.20 11.57 11.73

0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes spend on non-geographic voice calls

Fixed call volumes fell by 5.5% in 2008

Total fixed call volumes declined in 2008 as fixed-to-mobile substitution continued and the migration from narrowband to broadband internet services approached completion. Total fixed-originated call volumes fell by 10.9% to 143 billion minutes in 2008 as a result of a 5.5% reduction in voice call volumes, and a 66.7% drop in narrowband internet calls (Figure 4.33) which accounted for just 3.4% of total fixed-line calls in 2008, compared to over 50% five years previously.

Figure 4.33 Fixed telecoms call volumes

400 335 2008 5 year 304 growth CAGR 300 242 168 141 Narrowband -66.7% -50.8% 191 internet calls 200 82 161 42 143 15 5 Voice calls -5.5% -3.7%

Billions of minutes 100 167 163 159 149 147 139

0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators

BT’s share of calls from fixed lines to UK geographic numbers fell to under 50%

BT’s share of fixed voice call volumes continued to fall in 2008, with the rate of decline accelerating slightly compared to previous years (Figure 4.34). BT’s share of the volume of fixed-originated calls to UK geographic numbers fell to under 50% for the first time in 2008 (48.1%), and while its share of fixed-to-mobile call volumes was 51.2% this is likely to fall below 50% during 2009 if the current trend continues. Increasing use of wholesale line rental (WLR) and local loop unbundling (LLU) services has contributed to the increasing erosion of BT’s retail market share, and its share of outgoing international call minutes fell to under a third (32.0%) for the first time during the year.

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Figure 4.34 BT share of retail voice call volumes, by type

80 72.7 %age point change 66.2 One year Five years 61.1 70.9 57.7 60 55.4 64.4 51.2 Calls to -4.2 -21.6 58.8 mobiles 51.7 53.7 52.2 40 47.9 48.1 44.8 43.4 37.7 UK -4.1 -22.9 32.0 geographic 20 calls Market share (per cent) International -5.6 -19.7 0 calls 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators

Number of fixed lines fell by 0.2 million in 2008

The total number of UK fixed lines fell by 0.6% (0.2m) to 33.2m in 2008 (Figure 4.35) as the use of mobile phones and alternative forms of communication such as email, instant messaging and Voice over Internet Protocol (VoIP) increased. The rate of decline in the number of fixed lines was higher in the business market (1.8%) than in the residential market (0.1%), suggesting that business users are increasingly using mobile telephony services and / or VoIP.

While the number of digital subscriber line (DSL) and cable broadband connections grew in 2008, by 11.5% and 7.9% respectively, the number of ISDN channels declined. The widespread availability of cheap broadband services has made ISDN less popular as a way of connecting to the internet, although it is still used in some industries because of the stability of the connection, and to provide multiple voice telephony lines for larger business users.

Figure 4.35 Fixed telecoms connections

20 40 2008 5 year 34.9 34.0 34.5 33.5 33.5 33.2 growth CAGR

15 13.6 30 DSL 12.2 11.5% 50.8% 9.9 10 20 ISDN -2.5% -2.0% 7.2 channels 5.1 4.9 4.7 4.7 4.7 4.6 5 10 Cable 7.9% 21.9% 4.2 (millions) lines Fixed modem 1.7 3.7

Connectionschannels / (m) 3.4 2.7 3.1 0 1.4 1.9 0 Fixed lines -0.6% -1.0% (RHS) 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators; broadband excludes corporate connections

Fixed-line competition driven by take-up of wholesale line rental and local loop unbundling

The proportion of fixed lines taking a retail access service from a company other than BT was 38.1% at the end of 2008, an increase of 4.6 percentage points on a year previously. The availability of local loop unbundling (LLU) and wholesale line rental (WLR) have

227

promoted competition in the UK fixed access market, and BT has one of the lowest shares of fixed-line connections of any incumbent operator in Europe.

Wholesale line rental (WLR) and local loop unbundling (LLU) WLR With WLR the alternative telecoms provider buys a wholesale product from the incumbent (usually in conjunction with a wholesale call product such as CPS) and is then able to produce a single bill for the end-user covering calls and line rental. Broadband services can also be provided by the WLR operator (and included in a single bill) if a separate wholesale DSL product is purchased from the incumbent, but this is optional.

Full local loop unbundling (LLU) Full LLU involves the unbundling operator siting its own network equipment in the incumbent’s local exchange and connecting it to its core network. It then leases the copper wire to the end-user’s premises to the exchange from the incumbent, over which it provides fixed access and calls along with DSL broadband services. This is distinct from partial LLU, when the incumbent and LLU operator share the line, with the LLU operator providing DSL broadband services and the consumer continuing to be billed for voice services of the incumbent operator.

WLR and full LLU are therefore both ways in which alternative telecoms operators can offer their own branded fixed line rental services to consumers without the expense of rolling out their own local access networks. This is not the case with partial LLU as the incumbent continues to provide line rental services to the end-user.

At the end of 2008 16.0% of fixed lines were provided using WLR, nearly as many as by cable (13.9%) and other direct access operators (3.5%) combined, while an additional 4.8% of lines were provided using full LLU (Figure 4.36).

It should be noted that the chart below does not include those BT retail customers who take call services from another operator using carrier pre-selection (CPS) or other indirect access products.

Figure 4.36 Share of fixed lines taking non-BT voice services

50 %age point change One year Five years 40 38.1 33.5 4.8 Full LLU 1.7 4.8 29.8 3.1 30 0.8 23.9 16.0 19.6 0.3 12.5 13.5 WLR lines 2.5 16.0 17.8 6.9 20 2.4 4.5 3.5 3.6 3.5 3.3 3.5 Other direct 0.1 -1.0 10 access 13.3 13.7 13.5 13.9 Proportion of total lines (%) 13.2 13.0 0 Cable 0.3 0.5 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators; excludes BT retail lines taking call services from another operator

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84% of premises were connected to an unbundled local exchange at the end of 2008

Over the past few years many telecoms providers have invested in LLU networks. By the end of 2008 84.2% of UK premises were connected to an unbundled local exchange (Figure 4.37) meaning that in principle consumers had a choice of services other than those provided via wholesale services from BT or Kingston Communications. LLU providers have concentrated on unbundling exchanges connected to a large number of premises (due to the high up-front costs of unbundling an exchange) and this is reflected in the fact that the high level of LLU availability has been attained by unbundling just 34.7% of BT local exchanges. During 2008 the proportion of fixed lines taking LLU services (for broadband or broadband and voice) increased by 6.5 percentage points to 19.9%.

Figure 4.37 Proportion of unbundled exchanges and connected premises

%age point change 100 One year Three years 84.2 80.2 80 Proportion of premises 4.0 44.6 66.6 connected to unbundled BT 60 exchange 39.6 Proportion of BT 3.7 22.3

Per cent 34.7 40 31.0 exchanges that have 23.3 been unbundled 19.9 2012.4 13.4 4.7 0.7 Proportion of total lines 6.5 19.2 that have been 0 unbundled 2005 2006 2007 2008

Source: Ofcom / operators

The total number of LLU lines increased by 48% during 2008

At the end of June 2009 there were a total of 6.0 million unbundled lines, 1.8 million (30.3%) of which were providing both voice and broadband services (Figure 4.38). During the year to June 2009 the number of unbundled lines increased by 1.2 million (25.1%) with growth in the number of fully unbundled lines (34.2%) being greater than that of partially unbundled lines (21.6%). This reflects the fact that LLU-based services increasingly provide both voice and DSL broadband, sometimes in conjunction with other communications services such as digital television.

Figure 4.38 Fully and partially unbundled lines

6.0 6 5.5 2008 3 year growth CAGR

3.7 4 4.1 Partially 44.9% 247.6% 3.9 unbundled

2.7 2 1.3 Fully 54.5% 152.6% 1.8 Unbundled lines (millions) 1.0 1.6 unbundled 0.03 0.19 1.0 0 0.10 0.3 2004 2005 2006 2007 2008 H1 2009

Source: Ofcom / operators

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4.2.4 Mobile telephony

Revenue growth slowed to just 1.6% in 2008

Total mobile revenues increased by 2.2% to £15.4bn in the year to December 2008, significantly slower than the 8.9% revenue growth reported in 2007 (Figure 4.39). As operators fought to capture market share in a market where subscriber growth has slowed significantly, price competition contributed to limiting growth in mobile voice revenues to 1.6% (compared to 6.7% in 2007), while revenues from SMS messaging increased by just 0.3% in 2008, down from 11.3% in 2007. This slowing growth came despite increasing use – the overall volume of outbound mobile calls increased from 99.9 billion in 2007 to 111.0 billion in 2008, and the volume of outbound text messages rose from 62.6 billion in 2007 to 84.8 billion in 2008.

The fastest growth in mobile revenues came from non-SMS data services, where revenues increased by 15.2% in 2008 to £1.1bn, although this was also less than the previous year. Data revenue growth was driven by the growing popularity of data bolt-ons to mobile phone tariffs and the increasing take-up of mobile broadband services (whereby broadband access is provided via a cellular network by connecting a USB modem, or ‘dongle’, to a PC). According to Ofcom consumer research, 12% of UK households were using a mobile broadband service in Q1 2009 (see Section 4.3.3).

Figure 4.39 Estimated mobile retail revenue, by service

15.4 15.0 2008 5 year 15 13.8 1.1 13.1 0.9 growth CAGR 0.7 11.9 0.4 2.8 2.8 0.2 2.3 2.5 9.7 2.0 Data 15.2% 57.5% 10 0.1 revenue 1.7

10.6 11.3 11.5 SMS 0.3% 11.2% Revenue (£bn) Revenue 5 9.7 10.3 7.9 revenue

0 Voice 1.6% 7.7% revenue 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators

3UK had the fastest network revenue growth in 2008

O2 (including Tesco Mobile) remained the largest UK mobile network in terms of revenues in 2008, generating an estimated £4.3bn or 27.8% of the total, an increase of 0.7 percentage points on its share in 2007 (Figure 4.40). 3UK had the strongest turnover growth in 2008, with estimated revenues increasing by 9.1%, although it remained the smallest of the five networks in terms of revenues, with a 7.7% share. T-Mobile (including Virgin Mobile) and Vodafone’s estimated revenues both fell in 2008, by 2.8% and 1.4% respectively, as a result of falling prices (and declining subscriber numbers, in the case of T-Mobile).

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Figure 4.40 Estimated mobile retail revenue, by network operator

2008 5 year growth CAGR 15.0 15.4 15 13.8 1.2 13.1 1.1 3UK 9.1% 104.3% 12.5 1.0 0.9 3.2 3.4 9.7 3.0 3.0 10 3.1 Orange 5.2% 4.2% 2.7 2.6 2.7 2.2 2.1 2.5 T-Mobile (including -2.8% 5.5% 2.0 4.1 4.3 5 3.6 3.3 3.7 Virgin Mobile) 2.4 Retail revenue revenue Retail (£bn) O2 (including Tesco 4.9% 12.4% 4.0 4.0 2.6 3.6 3.7 3.7 Mobile) 0 Vodafone -1.4% 9.0% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators

Average monthly revenue per mobile connection fell by £0.42 in 2008

Falling prices contributed to a drop in average retail revenue per mobile subscription (of 2.4% or 42p a month) during 2008 (Figure 4.41). The majority of this was due to declining average voice revenues, which fell by 2.9% (38p a month). SMS revenues also declined, by 4.2% (14p per month) despite increasing message volumes per subscriber. Average spend on non-SMS data services went up by 11p a month, or 10.0% during the year, significantly slower than the 28.2% growth in 2007.

Average revenue per contract connection in 2008 was £32,20 (down from £35.03 in 2007) while average revenue per pre-pay connection increased from £7.74 to £7.85. Falling average revenue from contract mobile connections comes in the context of increasing take- up of sub-£20 contracts and an increasing proportion of mobile consumers being on contract rather than pre-pay connections (see Section 4.1.7).

Figure 4.41 Average monthly retail revenue per mobile subscription

20 £17.62 £17.31 £16.94 £17.42 £17.01 2008 5 year 0.35 £15.81 0.59 0.83 1.06 1.17 growth CAGR 15 0.18 2.97 3.06 2.70 3.10 3.26 3.12 Data 10.0% 45.8% services 10

14.30 12.93 13.66 13.02 13.11 12.73 SMS -4.2% 2.9% 5 messages Revenue Revenue (£per month) Voice calls -2.9% -0.3% 0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators

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Mobile subscriptions: O2 saw the biggest growth in 2008

At the end of 2008 there were 76.8 million active UK mobile subscriptions, 4.1% more than at the end of 2007 and equivalent to 1.26 connections per UK inhabitant (Figure 4.42)41. O2 (including Tesco Mobile) remained the largest network operator in 2008 with 21.5 million subscriptions at the end of the year - a market share of 27.9%.

O2 also achieved the largest increase in subscribers in 2008, at 1.4 million it accounted for just under half the total net increase during the year. The only network whose subscriber numbers did not increase in 2008 was T-Mobile (including Virgin Mobile) which saw its market share decline by 1.6 percentage points to 21.8% as its user base fell by 0.5 million, mainly as a result of falling Virgin Mobile subscriptions.

Figure 4.42 Mobile subscriptions, by network operator

2008 5 year growth CAGR 76.8 80 73.8 70.1 4.5 65.8 4.0 3UK 12.9% 81.3% 60.0 3.8 3.5 15.7 16.4 60 52.9 15.3 14.9 14.2 Orange 4.4% 3.7% 13.6 17.3 16.8 40 15.3 16.9 14.6 13.1 T-Mobile (including -3.0% 5.1% 20.0 21.5 Virgin Mobile) 17.0 19.0 20 13.2 14.7 Subscriptions (millions) Subscriptions O2 (including Tesco 7.2% 10.3% 12.7 14.0 15.2 15.0 16.8 17.7 Mobile) 0 Vodafone 5.4% 6.8% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators

The number of pre-pay mobile subscribers fell for the first time in 2008

The proportion of contract mobile subscriptions increased by 2.7 percentage points to 38.9% during 2008 (Figure 4.43). The introduction of cheaper tariffs and ‘SIM-only’ options are evidence of operators’ attempts to tempt pre-pay customers onto contracts. The strategy seems to be working: the number of pre-pay subscribers dropped for the first time in 2008, falling by 0.1 million (0.2%) to 46.9 million, while the number of contract customers increased by 3.1 million (11.7%) to 29.9 million.

41 This includes all connections that have been active in the previous 90-day period. The number therefore includes a number of subscriptions which are likely to no longer be in use, or only be in very occasional use.

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Figure 4.43 Pre-pay and contract mobile subscriptions

38.9 100 36.3 40 34.4 34.7 2008 5 year 32.7 33.7 growth CAGR 73.8 76.8 80 70.1 65.8 30 60.0 60 52.9 26.8 29.9 Contract 11.7% 11.6% 22.6 24.3 20.2 20 17.3 40 Pre-pay -0.2% 5.7% 43.2 45.8 47.0 46.9 10

20 39.8 Proportion contract (%)

Subscriptions (millions) 35.6 Proportion contract 0 0 (RHS) 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Notes: Based on network operator reported figures; includes estimates where Ofcom does not receive data from the operators

Almost a quarter of mobile connections used 3G at the end of 2008

Our data suggest that by the end of 2008 the total number of UK 3G mobile connections had risen to 17.9 million, an increase of 5.4 million (42.9%) on a year previously (Figure 4.44). This represented almost a quarter of all UK mobile subscriptions (23.3%), a 6.3 percentage point increase on the figure at the end of 2007. During 2008 Vodafone overtook 3UK to become the UK’s largest network in terms of 3G subscriptions, while O2, the largest network in terms of total subscriptions, ranked only third.

Figure 4.44 UK 3G subscriptions, by network operator

25 23.3 3UK 20 17.0 17.9 Orange 15 12.5 11.2 T-Mobile (including Virgin Mobile) 10 7.0 7.8 O2 (including Tesco 4.3 Mobile) 5 4.6 Vodafone

Subscriptions (m) / Per cent 2.6 0.2 0 % total subs 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators / Informa Note: 3G connections defined as connections sold with 3G-capable handsets

4.2.5 Internet services

Non-corporate internet revenues grew to £3.4bn in 2008

We estimate that residential and SME internet services generated revenue of £3.4bn in 2008, 0.1% higher than in 2007 (Figure 4.45). The story in the non-corporate internet market is one of increasing broadband take-up being offset by falling prices. Revenues from SME internet services were unchanged in 2008 at £0.5bn, while residential broadband revenues increased by £0.1bn (3.8%) to £2.7bn and residential narrowband revenues halved to £0.1bn as migration to broadband continued.

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Figure 4.45 Estimated UK internet and broadband retail revenue

4 2008 5 year 3.3 3.3 3.4 growth CAGR 3.0 0.6 0.5 0.5 3 2.6 0.5 SME 7.5% -3.0% 2.1 0.6 2 0.6 2.2 3.8% 36.5% 1.1 1.8 2.6 2.7 Residential 0.6 broadband

Revenue (£billion) 1 1.0 0.9 Residential -52.6% -34.1% 0.7 0.5 narrowband 0 0.2 0.1 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators

Residential and SME connections grew by 0.5 million in 2008

We estimate that at the end of 2008 there were 19.2 million UK residential and small business internet connections, an increase of 0.5 million (2.8%) on the previous year. During the year the number of residential narrowband connections fell by 41.1% to 1.7 million, as consumers switched to broadband, while the number of business narrowband connections was unchanged at 0.2 million (Figure 4.46).

There was growth in both the number of residential and SME broadband connections. The majority of broadband growth came from residential connections, which increased by 11.4% to 1.6 million during the year, while SME connections increased by 2.9% to 1.4 million. Falling residential broadband prices are highlighted by the fact that this 11.4% increase in the number of connections resulted in only a 3.8% increase in revenues from these services, as shown previously (see Figure 4.45).

Figure 4.46 UK residential and small business internet connections

20 18.7 19.2 2008 5 year 17.5 1.4 16.3 1.3 0.2 growth CAGR 15.3 1.3 0.2 1.1 0.2 15 13.5 0.7 0.3 0.3 0.5 SME 2.9% 22.4% 0.5 broadband 2.7 5.4 10 8.8 11.7 14.3 15.9 SME 11.2% -14.4% narrowband 5 9.9 8.8 Residential 11.4% 43.0%

Connections (millions) 6.1 4.3 broadband 2.9 1.7 0 Residential -41.1% -29.8% 2003 2004 2005 2006 2007 2008 narrowband

Source: Ofcom / operators Note: SME broadband includes some connections over leased lines

LLU drove broadband connection growth in 2008

The total number of UK fixed broadband connections increased by 10.7% to 17.3 million during 2008, an increase of 1.7 million connections, and Ofcom consumer research suggests that in Q1 2009 65% of UK households had a fixed broadband connection. The popularity of ‘free’ broadband packages when purchased in association with other services (which were first launched by TalkTalk and BSkyB in 2006) has made a significant contribution to growth in the number of broadband connections provided using LLU over the

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past few years (Figure 4.47). During 2008 the number of LLU DSL broadband connections grew by 47.6% to 5.5 million.

The total number of non-LLU DSL broadband connections fell by 0.4 million in 2008. While BT increased its connections by 12.2% during the year, the number of other non-LLU DSL connections fell by 20.5% to 3.4 million as a result of more consumers taking advantage of LLU-based services and ISPs migrating customers from BT’s wholesale DSL products onto their own LLU networks. Virgin Media increased its cable modem connections by 300,000 during 2008, but its share of broadband connections fell by 0.9% to 22.8%.

Figure 4.47 UK residential and small business broadband connections

20 2008 5 year 17.3 growth CAGR 15.6 15 5.5 Other 2.9% 33.5% 13.0 3.7 1.3 9.9 LLU DSL 47.6% 267.3% 10 3.1 3.4 3.7 2.7 6.1 Cable modem 7.9% 21.9% 5.5 4.3 3.4 5 3.1 1.9 4.7 Connections(millions) 2.7 Other non-LLU -20.5% 29.6% 1.4 4.1 4.6 0.9 2.3 3.1 DSL 0 0.8 1.4 BT retail DSL 12.2% 42.3% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Excludes connections made over cellular networks

Growth of LLU has contributed to ISP market consolidation

The introduction of LLU into the UK broadband market has caused consolidation. Operators have merged in order to take advantage of the economies of scale that LLU affords them (see Section 4.1.3) and this has led to the market share of smaller operators falling (the share of ISPs other than the largest six operators fell by one percentage point to 8.4% during 2008).

At the end of 2008 we estimate that the combined retail connection market share of the largest six ISPs was 91.5% (Figure 4.48), and this figure rose further in 2009, with the acquisition of Tiscali by Carphone Warehouse (the owner of TalkTalk and AOL Broadband) in July 2009. The new company is the UK’s second largest broadband provider, in terms of connections, after BT. BSkyB rapidly increased its market share during 2008, gaining 3.6 percentage points as a result of the popularity of its See, Surf, Speak packages, which bundle fixed calls and broadband with digital satellite TV services.

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Figure 4.48 Estimated UK broadband service provision retail connection share

%age point change 100% 8.4 10.2 12.8 15.9 13.5 9.3 One year Five years 4.8 7.3 5.8

(%) Other 80% 6.0 8.9 8.7 8.1 7.7 11.3 -1.0 -1.8 8.6 8.1 1.5 10.3 11.5 8.8 9.2 Orange Home 12.7 -1.5 1.0 60% 13.1 16.2 16.7 15.6 BSkyB 45.0 3.6 n/a 40% 33.9 23.7 22.8 Tiscali 28.7 25.4 0.5 3.3 TalkTalk/AOL 20% -1.1 7.1 B'band Share of connections 25.6 23.6 23.3 23.8 26.5 26.9 Virgin Media -0.9 -22.2 0% BT 2003 2004 2005 2006 2007 2008 0.4 1.3

Source: Ofcom / operators Note: Where ISPs have merged the historic market shares show the total for the constituent providers that made up the group at the end of 2008

4.2.6 Business markets

Operator-reported spend increased by 2% in 2008

Business spend on telecoms services increased by 2.0% to £13.9bn in 2008 (Figure 4.49). The net increase in business revenues was £0.3bn, as a 6.9% (£0.2bn) decline in fixed voice revenues was offset by a 6.4% (£0.4bn) increase in business mobile revenues. Revenues from non-corporate narrowband and broadband internet connections were unchanged at £0.5bn during the year, as were revenues from corporate data services, at £3.2bn.

Over the five years to 2008 the fastest growth in business revenues has come from mobile services, averaging 14.0% a year. Corporate data services have also grown over the period, increasing by an average of 3.3% annually, while both non-corporate internet and fixed voice have fallen over the period; in the case of fixed telephony this is as a result of declining use, and for internet services it is because prices have fallen.

Figure 4.49 UK business telecoms services revenue

15 13.6 13.9 13.0 2008 5 year 12.2 12.5 11.6 3.2 growth CAGR 3.1 3.1 3.2 2.8 2.9 0.5 0.5 10 0.6 0.6 0.5 Corporate 1.5% 3.3% 0.6 Data Services

3.6 4.6 5.1 5.8 6.5 6.9 Non-corporate 7.5% -3.0% 5 internet Revenue (£billion) Revenue 6.4% 14.0% 4.6 Mobile 4.2 3.8 3.5 3.4 3.1

0 Fixed voice -6.9% -7.4% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators / IDC

Average monthly revenue per business fixed line fell by £1.45 in 2008…

Average monthly voice revenue per business fixed line continued to decline in 2008, falling by 5.3% (£1.45) to £25.66 (Figure 4.50) as average call volumes per line fell (Figure 4.53). The largest proportional falls in call revenues were for local calls (16.6%) and national calls

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(11.5%), although there was also a significant drop in revenues from fixed-to-mobile calls (10.8%).

Figure 4.50 Average monthly voice revenue per business fixed line

40 2008 5 year £33.70 growth CAGR £30.62 30 £28.75 £27.65 7.61 £27.11 Calls to -10.8% -7.5% 7.06 £25.66 2.54 6.61 mobiles 6.37 5.78 5.15 4.54 2.33 2.20 International 2.0% -2.4% 20 3.57 2.06 2.21 2.26 3.40 2.92 2.69 2.45 2.17 2.96 2.72 2.87 2.54 2.12 £ per£ month National -11.5% -13.7% 10 15.60 14.70 14.28 13.67 14.13 13.96 Local -16.6% -9.1% 0 Line rental -1.2% -2.2% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Excludes revenues from non-geographic voice calls

…while mobile voice revenues increased by 4.5%

Business mobile revenues increased by 6.4% to £6.9bn in 2008 (Figure 4.51). Revenues from mobile data services (including SMS messaging) grew by 17.5% to £1.1bn and represented 16.2% of all business mobile revenues, up from 14.7% in 2007 and from just 6.8% in 2003. Growth in business mobile voice revenues was lower as a result of falling prices, rising by 4.5% to £5.8bn.

Figure 4.51 Breakdown of business mobile revenue

8 2008 5 year 6.9 6.5 growth CAGR 5.8 1.1 6 1.0 5.1 0.8 4.6 0.6 0.4 Data (inc. 17.5% 35.7% 4 3.6 SMS) 0.2 5.6 5.8 4.6 5.0

Revenue (£billion) Revenue 2 4.2 3.4 Voice calls 4.5% 11.6% and rental

0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators

Business telecoms call volumes grew as a result of increasing mobile use

Total originating business voice call volumes increased by 2.1% in 2008 to 89.1 billion minutes. Mobile-originated voice call volumes increased by 13.2% during the year to 53.6 billion minutes, or 60.9% of total business calls (Figure 4.52). 2008 was the second year in which business users generated more call minutes from mobile phones than from landlines, with the rate of fixed-mobile substitution among businesses having accelerated since 2005.

A possible explanation for this is that advances in the email capability of mobile handsets over the last few years have made mobile phones a more practical substitute for fixed-line telephony for business users, although it may also be an indication of increasing use of VoIP services among business users (the nature of VoIP makes it difficult to capture these calls in

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our figures). Fixed-originated call volumes continued to decline in 2008, and were 11.3% lower than they had been in 2007.

Figure 4.52 Business voice call volumes 100 87.4 89.1 2008 5 year 82.4 80.5 78.3 growth CAGR 80 77.2

26.4 28.2 60 31.6 38.5 47.4 53.6 Mobile 13.2% 15.2% 40 54.1 50.0 45.7 43.9 Fixed -11.3% -8.6% Call minutes minutes Call (billions) 20 40.0 35.4

0 2003 2004 2005 2006 2007 2008 32.8% 36.2% 41.2% 47.3% 54.9% 60.9% Proportion mobile Source: Ofcom / operators Note: Fixed data excludes non-geographic voice call volumes

Average fixed-originated voice call volumes per line fell by over 10% in 2008

The decline in outgoing business calls from fixed lines was reflected in average outgoing monthly call volumes per business fixed line falling by 10.3% to 293 minutes in 2008 (Figure 4.53). This figure is 8.7% higher than the average 270 monthly minutes per residential fixed line, although if current trends continue this position will reverse within the next few years. Call volumes per business line fell for all call types in the five years to 2008, reflecting increasing fixed-to-mobile substitution during the period.

Figure 4.53 Average weekly outbound voice call volumes per business fixed line 500 415 2008 5 year 389 growth CAGR 400 53 362 354 25 54 327 24 55 60 293 Calls to -4.7% 0.7% 300 22 23 57 mobiles 23 54 184 166 21 200 151 144 International -11.2% -3.8% 130 114 calls

Minutes Minutes per month 100 National -12.5% -9.1% 152 144 134 127 116 104 calls 0 Local calls -10.4% -7.4% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Excludes non-geographic voice call volumes

Numbers of business fixed lines were resilient in 2008

Although fixed business voice call volumes fell by over 10% during 2008, the number of fixed business lines fell by only 1.8% (Figure 4.54). This suggests that although there has been a significant shift from making fixed calls to making mobile calls among business users, many are reluctant to give up their fixed lines, as they are considered important in order for contact with clients, suppliers and customers.

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ISDN ISDN is a set of standards for digital transmission over ordinary telephone copper wire (and other media). The key feature of the ISDN is that it integrates speech and data on the same lines, resulting in better voice quality than a conventional analogue phone.

ISDN offers connections in increments of 64kbit/s (the equivalent of a standard analogue line). In the UK there are two main types of ISDN: ISDN2 (which consists of two 64kbit/s channels and a 16kbit/s signalling channel) and ISDN30 (thirty 64kbit/s channels and a 64kbit/s signalling channel). Each channel can be used independently, so an ISDN2 line can be used as two voice lines, one voice line and a 64kbit/s data connection, or as a 128kbit/s data connection.

Cheap broadband means that ISDN has largely been superseded as a method of internet connection, but it is still used in some industries as an ISDN data connection is always a fixed, reliable 64kbit/s. ISDN30 remains popular as a cost-effective way for large businesses to obtain multiple fixed-voice lines.

The number of analogue business lines fell by 1.3% to 5.2 million in 2008, while the number of ISDN30 channels increased by 1.1% to 3.2 million during the year, a reflection of the importance of ISDN30 to larger businesses. The largest drop in business lines in 2008 was a 10.8% fall in the number of ISDN2 channels to 1.3 million, a reflection of the fact that these lines are generally used for internet access, and in most cases can be replaced by a cheaper, faster broadband connection.

Figure 4.54 Business fixed lines, by type 15 2008 5 year growth CAGR 10.8 10.5 10.1 9.9 9.7 10 9.6 3.2 3.1 ISDN30 1.1% 1.1% 3.0 3.1 3.1 3.2 channels 1.7 1.6 1.5 1.5 1.4 1.3 5 ISDN2 -10.8% -5.4% channels 6.0 5.8 5.6 5.3 5.2 5.2 Lines / channels (millions) 0 PSTN lines -1.3 -3.0% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Figures may be overstated due to an element of double-counting of WLR lines

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4.3 The telecoms user

4.3.1 Introduction

This section considers consumer trends in the use of telecoms services over the past six years and how these relate to the wider industry trends discussed in the previous section.

We define ‘consumer’ as any user of telecoms services, separated into two main categories, residential and business. In this section we focus on the residential sector, both in order to provide continuity with the rest of this report (as broadcasting is focused very much on the residential sector), and because we believe that the residential sector benefits most from this type of analysis, as large companies’ information needs are well served by their own IT/telecoms departments and by relevant industry bodies. An overview of business markets is provided in Section 4.2.6 of this report, while Ofcom is also planning a research programme focusing specifically on the experiences of business users, which we aim to publish by Spring 2010.

The analysis that follows is based on data received from operators and our own consumer research. Third-party research is used to supplement the primary data, where appropriate.

The key findings from this section of the report are as follows:

 Household spend on telecoms services fell by 5.6% in real terms in 2008. Spend on fixed-line voice, mobile and broadband all fell during the year and household spend on telecoms services (3.2%) was its lowest since 2003 (page 242).

 In Q1 2009 65% of households had a fixed-line broadband connection. This was up from 58% a year previously and 70% of UK households now have an internet connection (page 247).

 Twenty-two per cent households in socio-economic group DE were mobile- only in Q1 2009. This compares to just 8% of ABC1 households (page 248).

 Mobile use continues to increase. Despite falling overall spend on mobile, average minutes per mobile connection were up 6% in 2008 to 123 minutes a month. Use of text messaging increased by 29% to an average of 99 per mobile connection as users increasingly took advantage of tariffs with ‘unlimited’ inclusive text messages (page 253).

 More than 90% of consumers are satisfied with fixed voice, fixed broadband and mobile services. However, satisfaction with fixed-line broadband speeds was 81% in Q1 2009, down from 90% three years previously. Overall satisfaction with mobile broadband was lower (83%) than for the other services, with only 71% of users satisfied with speed (Section 4.3.5).

 Switching levels fell in 2008. A lower proportion of fixed voice, mobile and fixed line broadband users claimed to have switched provider in the 12 months in Q1 2009 than a year previously. This may be due to consumers committing to longer contracts in return for lower prices (page 259).

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4.3.2 Household spend and pricing

Spend falls across all services

In 2008, household spend on telecoms services as a proportion of total household expenditure fell to its lowest level (3.2%) since 2003 (see Figure 4.55). Total spend on telecoms services fell by 5.6% in real terms over the year, the largest annual decline since spend on telecoms services began to fall in 2006.42

Figure 4.55 Average household spend on telecom services

120 4% 3.4% 3.4% 3.3% 3.4% 3.2% 3.2% 100 3% Internet & broadband 80 £72.21 £67.72 £71.84 £70.09 £68.84 £65.01 Mobile voice & text 7.25 9.22 10.69 11.53 60 11.37 10.71 2% 29.13 33.51 34.88 Fixed voice 40 33.66 33.98 32.04 1% As a %age of total 20 household spend £ per month (2007 prices) 31.34 29.11 26.64 24.90 23.49

22.26 a %As of total expenditure 0 0% 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators / ONS Notes: Includes estimates where Ofcom does not receive data from operators; adjusted to CPI; includes VAT

Decline in fixed-voice spend slows

Residential fixed-line voice spend fell by 5.3% in real terms during 2008 (see Figure 4.55 above), driven by a fall in the total number of lines (by 0.5 million) and lower use per line as consumers increasingly substitute voice services over mobile for fixed-line calls. The fall in spend on fixed-line voice in 2008 comes despite higher line rental fees from some operators; for example, in February 2008 BT increased the cost of line rental from £11 per month to £11.75 (at the same time as introducing free weekend calls to UK geographic numbers for all customers, and increasing daytime and evening call prices on its basic tariff).

Spend on mobile services fell by 5.7% in real terms during 2008, despite a 6% rise in the average number of voice calls per mobile connection. This is due to falling line rental prices (see Section 4.1.7), and increasing numbers of inclusive voice minutes and SMS messages being included within pay-monthly tariffs (and SIM-only contract tariffs in particular) and some pre-pay tariffs.

Average spend on internet and broadband services fell by 5.8% in 2008 as an increasing proportion of consumers took advantage of discounted or even 'free' broadband bundled in with other services such as voice (for example, TalkTalk offers broadband at a lower rate to fixed-line voice customers in unbundled areas), television (Sky was the fastest growing broadband provider in 2008 due to the popularity of its See, Speak, Surf bundled satellite TV, fixed calls and broadband package) and mobile services (for example Virgin Media). In

42 In order to reflect these changes in household spend in real terms they have been inflation- adjusted, using the consumer price index (CPI) which increased 3.6% during 2008. The number of UK households also increased by 1.2% during 2008. This explains why average spend per household fell in 2008 even while there was a small increase in overall industry retail revenues

242 addition, some operators including O2, BT and Virgin Media have within the last year launched bundled mobile broadband and fixed broadband services.

The figures shown are based on operators’ own allocation of revenues and should be treated with some caution, as the increased take-up of bundled offerings makes it difficult to precisely apportion spending.

Overall cost of fixed-line falls but cost of calling mobiles rises

We use analysis of the cost of a basket of telecoms services as a means of comparing costs over time. This analysis derives the 'real cost' to the consumer by calculating the average price per minute for access and calls (and price per text message for mobile) in a year, and then defining the basket as the average number of minutes (and messages) used in 2008. Costs are then adjusted for changes in the consumer prices index (CPI) in order to provide a year-on-year comparison.

Figure 4.56 shows that the real cost of a basket of residential fixed voice services fell by £0.34 or 1.5% in 2008, slightly larger than previous falls over the past five years. While the average cost of residential fixed access has remained fairly static over the past five years, calls to other fixed lines (UK and international) have fallen over the same period. The average cost of residential calls to an international number fell by £0.38 in 2008, perhaps due to increasing take-up of international ‘add-ons’ which provide discounted call rates to certain international destinations.

The cost of fixed calls to mobiles increased by 3.9% in 2008 as the proportion of fixed-line calls made to mobiles continues to rise. While the cost of calling UK fixed lines has fallen sharply, as more inclusive calls are incorporated within basic tariff packages, calls to mobiles are generally not included (although discounts are available for a monthly fee, in add-ons such as BT’s Friends & Family Mobile).

Figure 4.56 Real cost of a basket of residential fixed voice services

30 s) £25.04 e £23.33 c £22.34 £22.18 £21.94 ri 4.33 £21.57 p 3.90 7 20 3.55 3.51 3.82 0 2.72 3.97 0 2.31 2.11 2.11 1.65 Calls to mobiles 2 1.28 ( 5.63 4.60 4.00 3.67 3.70 3.66 International calls th n o UK geographic calls m10 r Fixed access e 12.36 12.52 12.69 12.89 12.77 12.67 p £ 0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes VAT; excludes non-geographic voice calls

Cost of mobile continues to fall

Applying the same analysis to look at a mobile basket finds that the real cost of mobile services fell by 11% in 2008 as the cost of making calls (outside any bundled offerings) to mobiles on the same network (on-net), to other networks (off-net) and the average cost of messaging continued to decrease. Over a five-year period the cost of this basket of mobile services has fallen from £31.49 to £16.71 (Figure 4.57), with an average annual fall of 11.9%. However, this must be treated with caution as there is, of course, a relationship

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between prices and usage – average call volumes were much lower in 2003 than in 2008, partly because prices were higher, so while applying 2008 call volumes to compare pricing provides some insight into pricing trends, it does not represent consumer spending.

The cost of metered calls and messaging has fallen rapidly as a higher proportion of minutes and text messages are included within monthly allowances for contract customers, and more 'bonus' minutes and credit are available on pre-pay. This has led to significantly reduced costs per minute, which has in turn driven higher usage levels. However, at the same time the average cost of combined line rental, bundled minutes and calls to fixed lines has increased since 2006. This reflects an increase in the number of contract subscriptions with inclusive minutes and messages as a proportion of the total subscription base; the proportion of pay-monthly (rather than pay-as-you-go) mobile connections increased from 34% in 2004 to 39% in 2008.

Figure 4.57 Real cost of a basket of mobile services

40.00

£31.49 £29.27 Metered 30.00 £26.20 messaging 9.20 8.42 £22.22 Metered voice 7.90 £18.79 20.00 6.40 £16.71 12.27 10.20 5.01 3.55 Line rental fee £ per£ month 7.91 and inclusive 6.24 4.09 3.27 10.00 calls and texts 10.02 10.65 10.39 9.57 9.69 9.90 0.00 2003 2004 2005 2006 2007 2008 Source: Ofcom / operators Note: Includes VAT; excludes non-geographic voice calls

Cost of mobile calls falls as fixed rises

Average prices per minute for mobile and fixed calls continued to narrow in 2008, when the average cost of a mobile minute was 10.4p, 41% more than the cost of an average fixed-line call minute (Figure 4.58). It should be noted that the average cost-per-minute for mobiles is over-stated as it includes the value of the handset subsidy which mobile operators recoup over the duration of the contract.

Average fixed-line call charges rose to 7.4p a minute in 2008. This may seem surprising, given that a characteristic of the market was the inclusion of more call types within standard access tariffs. However, higher line rental prices from some operators and rises in the prices of some types of calls, together with falling overall call volumes meant that for the second consecutive year there was an overall increase in the average price per minute (which we calculate simply by dividing total revenues from access and voice calls by the total number of voice minutes).

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Figure 4.58 Comparison of average fixed and mobile voice call charges

20.00

15.1 14.4 15.00 13.5 12.9 2008 growth 5 year CAGR 11.3 10.4 10.00 Mobile -8.5% -5.1% 7.4 6.9 6.6 6.6 6.7 7.2 Fixed 3.2% 1.4%

Pence perPence minute 5.00

0.00 2003 2004 2005 2006 2007 2008 Source: Ofcom / operators

The cost per minute of pre-pay calls fell more steeply (down 14.8% to 8.2p) than the cost of calls from contract connections (down 6.3% to 11.2p) during 2008 (Figure 4.59). Note, however, that the cost per minute for contract connections also includes the cost of the handset, which is included ‘free’ within many contract subscriptions, with operators recouping the cost of the handset over the duration of the contract. In addition over half of calls made by pre-pay users are on-net (terminate on the same network), compared to just over a quarter of contract calls, and on-net calls are generally charged at a lower rate than off-net calls (terminate on another mobile networks) and calls to landlines.

Figure 4.59 Average mobile cost per voice minute, by customer type 20 16.6 15.9 2008 5 year 14.8 growth CAGR 15 13.0 12.0 14.6 14.3 11.2 12.7 12.5 10 Contract -6.3% -2.5% 9.6 8.2

Pence per minute 5 Pre-pay -14.8% -12.3%

0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators; contract includes rental element; analysis of price per minute for contract calls incorporates monthly line rental which often includes a number of inclusive SMS messages (and sometimes data allowance); figures are calculated using actual minutes of usage; figures have been restated to reflect more accurate data

Consumers seek greater value through bundling of services

Broadband is often purchased as part of a bundle, alongside other communication services, with some operators offering significant discounts if the services are purchased together. Some of the leading broadband providers, such as TalkTalk, bundle unlimited calls at set times with their fixed-line and broadband package, while BSkyB provides ‘free’ broadband if Sky Talk, an inclusive free evenings and weekends call package, is purchased (Figure 4.60).

While some providers, such as BT, offer broadband speeds of ‘up to’ 8Mbit/s across all their tariffs and tier pricing according to data volumes and other non-speed service aspects, other providers have introduced tiered pricing by speed. For example, Virgin Media charges

245 different monthly rates for ‘up to’ 10Mbit/s, 20Mbit/s and 50Mbit/s speeds. And some providers such as O2 and Orange bundle mobile broadband with fixed broadband, appealing to those who consider the two services as complementary rather than direct substitutes for each other.

Figure 4.60 Lowest cost broadband options from major suppliers, July 2009 (£ per month)

Broadband, Broadband, Broadband, Broadband fixed and fixed line and fixed, mobile, Provider fixed mobile TV and TV AOL Broadband £21.24 - - - Be £24.75 - - - BSkyB - - £26.50 - BT £26.90 - £25.92 - O2 £23.48 £28.38 - - Orange Home £21.04 £29.84 - - Plus.net £16.94 - - - TalkTalk £17.74 - - - Tesco £28.83 £37.80 - - Tiscali £14.67 - £19.56 - Virgin Media £24.47 £36.21 £24.47 £36.21 Vodafone £35.00 £35.00 - -

Source: Pure Pricing UK Broadband, Bundling and Convergence Update, July 2009 Notes: Includes £11.25 BT line rental as relevant; lowest cost option / lowest price combination is shown; activation charges and promotional discounts are excluded; mobile options may be SIM-only; allowances for fixed-line and mobile calls, plus availability of TV channels included within packages may differ by operator and option.

4.3.3 Take-up of services

Nearly two-thirds of households had a fixed broadband connection in Q1 2009

Growth in household penetration of fixed broadband services continued in 2008, reaching 65% in Q1 2009 compared to 58% in Q1 200843. Lower stand-alone fixed broadband tariffs and the increasing take-up of broadband services as part of bundled packages (see Figure 4.60) mean that in many cases broadband prices are equivalent to, or even lower than, dial- up internet. For example, PlusNet broadband customers living in an area covered by an exchange it has unbundled pay £5.99 per month for ‘up to’ 8Mbit/s broadband and a 10GB allowance, which is the same price as a metered dial-up internet service with 60 hours of monthly use from internet service provider Zaggle.

43 2008 fixed broadband data may include some mobile broadband connections although the majority of broadband connections at the time were fixed

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Fixed-line penetration has remained relatively stable at 87% in 2009, following a fall during 2007 (Figure 4.61). Mobile broadband had significant take-up during 2008, and by Q1 2009, 12% of households connected to the internet via a mobile ’dongle’ (although only 3% of households used mobile broadband as their only means of connecting to the internet - the majority of mobile broadband users have it as a complement to fixed-broadband services rather than a direct substitute). Take-up ranged from 91% in Scotland’s Highland and Islands, to 82% in Cardiff, 76% in Belfast and 75% in Leicester.

Figure 4.61 Household penetration of key telecoms technologies 93 100 90 90 93 93 92 90 90 Fixed telephony 80 85 89 88 87 70 64 67 57 60 Mobile telephony 60 50 65 41 52 58 Internet connection 40 27 Fixed broadband 20 11 internet Proportion of adults (%) 12 Mobile broadband 0 internet Q4 2003 Q4 2004 Q1 2006 Q1 2007 Q1 2008 Q1 2009

Source: Ofcom technology tracker Base: All UK adults aged 15+

Most households continue to have both fixed and mobile

Despite the increasing take-up of mobile telephony among adults, the proportion of households which rely exclusively on a mobile connection for all their communications needs has remained stable since 2006 (Figure 4.62). Four in five households continue to have both a fixed and mobile connection (unchanged since 2003), indicating that while consumers are increasingly substituting mobile for fixed calls44, the large majority of households continue to have a fixed line. The need for a fixed line in order to connect to the internet using DSL broadband may have constrained further growth in mobile-only households (a fixed voice line connection is required for all DSL broadband in the UK), and voice services are included within most cable broadband tariffs. However, this may change as consumers increasingly use mobile broadband to connect to the internet.

44 According to Ofcom research 38% of adults stated their mobile is their main method of telephony (both inside and outside the home), a rise from 33% in Q1 2008 and 30% in Q2 2006.

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Figure 4.62 Household penetration of fixed and mobile telephony

100% 1 1 1 1 1 6 9 10 11 10 13 12 None 80% Mobile only Fixed and mobile 60% 79 Fixed only 80 80 81 82 78 80 40%

20% Proportion of adults (%) 14 10 9 8 0% 7 7 7 2003 2004 2005 2006 2007 2008 2009

Source: Ofcom technology tracker Base: All UK adults aged 15+

One in five DE households are mobile-only

There were significant differences in the household penetration of communications services by socio-economic group in Q1 2009 (Figure 4.63). Twenty two per cent of DE households were mobile-only (largely unchanged from Q1 2008 at 23%), compared to 8% of ABC1 households. The costs associated with subscribing to a broadband connection, combined with the cost of a PC or laptop may partly explain why less than half of DE households had a broadband connection in Q1 2009, compared to nearly four in five ABC1 households.

ABC1 households were almost twice as likely as C2 and DE households to have a mobile broadband connection. However, the large majority of ABC1 households with a mobile broadband connection also had a fixed-line connection, while C2DE households were more likely to use mobile broadband as their sole means of internet access (See Section 4.1.5 in Telecoms: Key Market Developments).

Figure 4.63 Household telecoms connections, by socio-economic group

100100 98 100 79 80 76 64 66 ABC1 60 47 43 C2 40 DE 22

Proportion of adults(%) 15 20 12 10 5 5 8 8 8 0 Fixed line-only Mobile-only Fixed Mobile Total Have any broadband broadband broadband connection

Source: Ofcom technology tracker, Q1 2009 Base: All UK adults aged 15+ Note: mobile-only and fixed only relate only to phones, i.e. mobile-only and fixed-only may also have an internet connection. Any connection refers to fixed, mobile or broadband.

248

Younger people are more likely to be mobile-only

More than one in four 15-24 year-olds live in mobile-only households, compared to just 3% of over 65s. This is indicative of the continued importance of a fixed-line connection for older age groups, while younger people are more likely to rely solely on a mobile connection partly because they have grown up in a world where mobile communication is a way of life, and partly because they are more likely to live in shared or temporary accommodation and are therefore less likely to make a household investment in a fixed-line connection.

Figure 4.64 Mobile-only households by age, Q1 2009

30 26

21 20

12 10 10 4 only households (%) 3

0 Proportion of adults living in mobile- Total 15-24 25-34 35-54 55-64 65+

Source: Ofcom technology tracker, Q1 2009 Base: All UK adults aged 15+ Note: mobile only and fixed only relate only to telecoms and not internet as well i.e. mobile only may have internet and fixed only may have internet. Any connection refers to fixed, mobile or broadband.

4% of households have a PC but do not have an internet connection

Further growth in internet penetration will require increasing levels of PC ownership. Figure 4.65 indicates that the gap between household internet penetration and PC ownership narrowed to 4% in Q1 2009. The growth in PC ownership from 72% of households in Q1 2008 to 74% of households in Q1 2009, combined with increasing take-up of fixed and mobile broadband, suggests that the desire to get connected to the internet is likely to be the major motivation to purchase a PC. The emergence of mobile broadband tariffs, which include the purchase of a laptop within the monthly fee, may be driving increased PC ownership, particularly among households that do not have a fixed-line connection.

Figure 4.65 Household PC and internet penetration

74 80 71 72 67 69 (%) 65 70 67 PC penetration 60 63 64 65 adults 57 57 58 52 Internet 40 penetration 41 Fixed broadband penetration

Proportion of 20 27 12 Mobile broadband penetration 11 0 Q4 2004 Q4 2005 Q4 2006 Q1 2007 Q1 2008 Q1 2009

Source: Ofcom technology tracker Base: All UK adults aged 15+

249

More than a third of those without internet at home say they have no need for it

Of those without a broadband connection, nearly one-fifth (18%) of respondents said they are likely to get the internet in the next six months (Figure 4.66). The majority of those without the internet (37%) said their main reason for not having it was because they were not interested or had no need for it. A smaller proportion (26%) said that the price of using a broadband internet service, whether it is the cost of a PC or paying the monthly broadband fee, prevented them from getting online. Specific issues identified within this group included the internet being too expensive, not being able to justify the cost, unable to afford a computer, not having a landline or being unwilling to commit to a 12-month contract.

Figure 4.66 Reasons for not taking up the internet

20 37 without without internetthe 26 10 18 5 0 4

%of those Likely to get in next Too expensive Don't have Not interested I don't need it at 6 months knowledge/skills home

Source: Ofcom Access and Inclusion research Note: 10% - Not aware of the internet/give another reason as their main reason/don’t know their main reason Base: Adults 15+ without broadband. (add size) Intention to get internet in next 6 months; Main reason for not having the internet at home – prompted

Take-up of internet lowest in older age groups

Older people are significantly less likely to have home internet access than those in younger age groups: more than six in ten 65-74 year olds do not have a home internet connection, and this rose to more than eight in ten among over-75s (Figure 4.67). The highest take-up level was among the 35-54 age-group, while a quarter of 15-24-year-olds did not have home internet access.

Figure 4.67 Non-ownership of home broadband, by age group

100

40 82 61 20 39 25 21 17 0 % without broadband without internet % 15-24 25-34 35-54 55-64 65-74 75+

Source: Ofcom technology tracker, Q1 2009 Base: All UK adults aged 15+ without broadband internet at home

250

One in four access the internet a work

It should not be assumed that all those without home internet access are not internet users, as there are a number of other locations where people can access the internet. More than one in ten web users accessed the internet at someone else’s home in Q1 2009, and a similar proportion did so at a library or educational institution (Figure 4.68). There was a small decline in the number of internet users using an internet café, shop or kiosk. This may be the consequence of a fall in availability of such places, as increasing take-up of the internet within the home (fixed and mobile) makes these businesses less commercially viable.

Figure 4.68 Location of internet access

Proportion of adults 15+ (%) 0 20 40 60

67 At home 61 64 24 At work 25 27 12 74% of UK In someone else's home 15 13 adults use 12 the internet In library or educational institution 14 13 5 Anywhere via a portable device 5 5 4 Q1 2009 In internet café, shop or kiosk 7 6 Q1 2008 1 At other locations 2 Q1 2007 3

Source: Ofcom technology tracker, Q1 2009 Base: All UK adults aged 15+

Use and awareness of VoIP increases

There was greater awareness of Voice over Internet Protocol (VoIP) among UK adults and indications of higher use of the service in Q1 2009 compared to last year. Twelve per cent of adults claimed to be using VoIP in Q1 2009, an increase from 9% a year previously while three out of five adults are now aware of the service. Seventeen per cent of adults claimed to have access to VoIP, indicating that 70% of those with access to VoIP use it.

The majority of adults claim not to use VoIP services. This may be due to concerns over the quality of service of calls over VoIP, a lack of understanding of how to use it, or because competition from low-priced fixed and mobile telecoms services on calls both within the UK and internationally make VoIP a less attractive proposition; for example, BT’s series of ‘International Add-ons’ provide discounted or inclusive international calls for a low monthly tariff (from £1 to £4.89).

The level of take-up of VoIP services may be higher than indicated by our research, as users of VoIP-based services such as BT’s home hub phone, or Orange’s phone service via the Livebox (where a standard phone is connected into a wireless router) may be unaware that they are using the technology; it is hidden behind what may be perceived by the customer as a standard fixed-line service over the Public Switched Telephone Network (PSTN).

251

Figure 4.69 Awareness, stated access and use of VoIP

80%

60% Q1 2008

Q1 2009 40%

61 55

% of UK adults aged 15+ 20%

17 9 12 0% Awareness of VoIP Stated access to VoIP Stated current use of VoIP

Source: Ofcom technology tracker, Q1 2009 Base: All UK adults aged 15+ (n = 6090 2009, 5812 2008) Note: Question wording changed in 2009 so treat year-on year comparison with caution. Stated access to VoIP not collected in 2008.

4.3.4 Fixed-line and mobile use

Overall residential fixed-line call volumes decline but international volumes rise

Average voice volumes per residential fixed line fell slightly (1.2%) in 2008 as mobile continued to take an increasing share of call volumes. The fall was the smallest since average residential fixed-line volumes began to decline in 2005 (see Figure 4.70). Falling volumes of UK calls and calls to mobiles were offset by growth in international calls (up 23%) as operators promoted international call tariffs. Such calls are less likely to be substituted by mobile, as international call costs from a mobile are generally higher than those from a fixed line, and are not included in call allowances within monthly mobile contracts.

Figure 4.70 Average monthly voice call volumes per residential fixed line

400

303.7 305.9 300.1 300 291.6 29.4 30.4 30.3 273.1 269.7 10.2 10.5 29.2 month 10.1 9.6 26.7 24.2 11.2 13.8 Calls to mobiles

200 International calls

Minutes perMinutes UK geographic 264.2 265.0 259.7 252.8 235.2 231.7 calls 100

0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Excludes non-geographic voice calls

252 Call volumes per connection increased by 6% in 2008

There were 111.0 billion minutes of calls made from UK mobile phones in 2008 (up from 99.9billion in 2007). In part this was driven by an increase in the number of mobile connections (from 73.8 million at the end of 2007 to 76.8 billion at the end of 2008). However, most of this increase was driven by users making more calls from their phones. On average, more than two hours of calls (123 minutes) were made every month from mobile connections in 2008, an increase of 6% on the previous year (see Figure 4.71). Calls between mobiles were the main driver of growth in mobile call volumes, reflecting the increasing number of any-network minutes included in contract plans, and some pre-pay tariffs.

Despite the total volume of calls to fixed-lines increasing during 2008, the average made per mobile connection fell by 3.1%. This may be partially due to growth in the number of mobile subscriptions focused on specific call types, such as low-cost international services (and therefore not typically making any calls to UK fixed numbers), in addition to a general trend towards consumers communicating via mobile phones rather than using fixed-line numbers.

Figure 4.71 Average monthly outbound voice minutes per mobile connection

Total UK outbound 58.9 64.2 71.4 82.5 99.9 111.0 mobile voice minutes 150 (billions) 122.8 115.7 13.9 101.2 13.1 1.9 100 95.9 94.7 94.6 1.6 Other 12.3 8.3 9.3 33.3 1.3 1.1 11.6 1.3 31.7 International 16.9 1.2 19.3 21.2 25.7 Off-net 31.4 42.3 On-net 50 30.1 28.3 30.2 37.0 UK fixed Minutes per month

38.0 34.8 32.3 31.7 32.3 31.3 0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: ‘Other calls’ include roaming, premium rate calls, WAP calls and all other call types

Average contract call volumes per connection fall while pre-pay grows

The average monthly volume of call minutes per contract mobile connection declined during 2008, following increases in 2006 and 2007 (Figure 4.72). Operators’ focus on migrating pre- pay users onto contract plans (See Section 4.1.7) has led to some lighter mobile users, who were previously using pre-pay, moving to low-cost contract plans. In contrast, voice use per pre-pay connection increased by 14% in 2008 as users took advantage of the increasing value of top-up rewards, such as free credit or calls (for example free on-net and anytime calls on T-Mobile Mates Rates when users credit their account with £15 or more per month).

253 Figure 4.72 Average outbound mobile minutes, by customer type

300 237 234 225 219 218 h 211 200 Contract

100 Pre-pay 49 56 Minutes permont 35 33 35 39

0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators

Users send 99 text messages per month

Growth in the volume of text messages sent showed no sign of slowing in 2008. In total over 85 billion text messages were sent (up from 63 billion in 2007). This represented an increase in the number of texts sent per mobile connection of 29% to an average of 99 texts per month (Figure 4.73). This is despite the increased availability of alternative messaging services, such as email and instant messaging, in addition to messaging services available on mobile versions of social networking sites.

As with voice minutes, the inclusion of more text messages, or even unlimited texts on some tariff plans, is contributing to this growth. Unlimited text allowances are a standard feature in the majority of £15-a-month or more SIM-only plans from 3UK, Virgin Mobile and Vodafone (see Section 4.1.7).

In contrast to text messaging, take-up of picture messaging remains low with just 0.56 multimedia messages per month (MMS) sent per mobile connection in 2008, although this did represent an increase from 0.39 in 2007. While there is wide availability of cameras on new mobile phones, the limited availability of tariffs with inclusive MMS, and the high price of MMS relative to texts (for example Vodafone’s standard price for a picture message is 36p), means that only a small proportion of pictures taken on a mobile are sent as an MMS over a mobile network.

254 Figure 4.73 Monthly text and picture messages per mobile connection

Total UK outbound 22.2 27.0 35.6 46.2 62.9 85.3 mobile text and picture messages (billions) 100 0.56

75 0.40

0.29 50 0.35 99 Picture messages 0.19 0.04 72 Text messages 25 56 40 47 Messages per month 36

0 2003 2004 2005 2006 2007 2008

Source: Ofcom / operators Note: Includes estimates where Ofcom does not receive data from operators

4.3.5 Customer satisfaction and switching

More customers are very satisfied with their fixed-line service

Overall satisfaction with fixed-line services stood at 92% in the UK in Q1 2009, slightly higher than a year previously, while the number of fixed-line customers who were ‘very satisfied’ rose to 58% (Figure 4.74). The proportion of consumers who were satisfied with the value for money of their landline service increased between Q1 2008 and Q1 2009, with 84% of consumers ‘satisfied’ and nearly half of consumers (49%) ‘very satisfied’ in Q1 2009, compared to just under one-third who were ‘very satisfied’ in Q1 2008.

This rise may be a reflection of the inclusion of unlimited off-peak calls becoming standard on some plans in 2008 (for example, in February 2008 BT included free weekend calls to all UK geographic numbers on its basic line rentals – albeit increasing the price of the line rental by 50p per month and increasing daytime and evening call prices at the same time), as well as perceived better value from the increased take-up of dual-play (voice and broadband) and triple-play (voice, broadband and TV) bundles.

255

Figure 4.74 Residential consumer satisfaction with fixed-line services

100 92 88 92 78 84 77 80 41 60 56 58 29 32 49 Very satisfied 40

51 49 46 Satisfied 20 32 34 35 0 % of adults 15+ with with service 15+ % of adults Q1 2008 Q1 2009 Q1 Q1 2006 Q1 2008 Q1 2009 Q1 2006 Q1 Overall Value for money

Source: Ofcom technology tracker Base: All adults aged 15+ with fixed line Note: Includes only those who expressed an opinion

Satisfaction with broadband speeds continues to fall

Overall satisfaction with broadband services largely mirrored that of fixed-line, with nine in ten consumers being satisfied with the service (Figure 4.75). Satisfaction with value for money remained stable while satisfaction with speed continued to fall, with 81% of consumers satisfied with speed in Q1 2009, compared to 90% in Q1 2006. This was despite increasing average headline speeds during the period and may be the result of a changing expectations – in 2006 many consumers may have been comparing broadband services against narrowband (dial-up) access, while in 2009 broadband has become widespread as have online applications which require faster downstream speeds, such as the BBC iPlayer.

Figure 4.75 Residential customer satisfaction with aspects of broadband service

88 100 92 89 90 83 90 83 84 84 84 78 81 80 44 38 43 52 33 26 34 60 55 50 48 49 45 Very satisfied 40 Satisfied 48 50 51 52 47 50 20 34 38 33 36 34 36 % of adults % of adults 15+ service with

0 Q1 2006 Q1 2007 Q1 2008 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2006 Q1 2007 Q1 2008 Q1 2009 *Q1 2009 Value for Overall money Speed of service

Source: Ofcom technology tracker Base: All UK adults aged 15+ with broadband (fixed broadband only from 2009)

256

Note: Includes only those who expressed an opinion. *Q1 2009 figures based on fixed broadband service

Satisfaction with mobile broadband lower than with fixed broadband

For the first time in Q1 2009 we surveyed consumers on their perception of mobile broadband services and found that eight in ten users of mobile broadband were satisfied with the services overall, while seven in ten were satisfied with the speed of the service (Figure 4.76). This is lower than for fixed broadband services, and is likely to be a reflection of the wider variation in quality of service that can be delivered over a mobile network, as well as lower average speeds. While actual broadband speeds can vary significantly on both fixed and mobile networks, average actual speeds of mobile broadband are much slower than fixed-line broadband.45

There is also likely to be much greater variation in mobile broadband performance than fixed broadband performance, caused by variable factors such as the distance from the nearest mobile base station, the type of building the user is in when accessing the service, and other physical factors such as trees and buildings which may interfere with the signal, in addition to the number of users of high-speed mobile services in the same cell site.

Figure 4.76 Customer satisfaction with aspects of mobile broadband service

100 83 78 80 71

60 42 41 35 Very satisfied

40 Satisfied

20 40 37 35

0 0 % of adults % of adults 15+ service with Overall Value for money Speed of service

Source: Ofcom technology tracker, Q1 2009 Base: All UK adults aged 15+ with mobile broadband Note: Includes only those who expressed an opinion; trend data is not available as this is the

More users satisfied with value for money of mobile services

The proportion of consumers satisfied with their overall mobile phone service was unchanged at 94% in Q1 2009, with nearly two-thirds (62%) being ‘very satisfied’ with their service (Figure 4.77). Satisfaction with value for money increased to 90%, perhaps driven by many consumers benefiting from falling prices, as more inclusive or ‘free’ minutes are included within contract and pre-pay plans, and the increasing availability of lower cost contracts and SIM-only deals. This high level of satisfaction fits in with our consumer research, covered in Section 1.2 - Communication markets and the Recession, which found that one in four people agreed that mobile providers were now offering better deals than they did a year ago.

45 Data published by Epitiro in June 2009 suggest that mobile broadband at headline speeds of ‘up to’ 3.6Mbit/s or ‘up to’ 7.2Mbit/s typically deliver average actual speeds of less than 1Mbit/s (www.epitiro.com/news/epitiro-publishes-uk-mobile-broadband-research.html); in comparison, our research into fixed-line broadband speeds found average speeds of around 4Mbit/s in April 2009 www.ofcom.org.uk/research/telecoms/reports/broadband_speeds/broadband_speeds/

257

Figure 4.77 Residential consumer satisfaction with mobile services

94 100 92 94 86 90 88 88 86 83 80 40 32 33 59 62 60 54 59 58 59 Very satisfied 40 Satisfied 52 54 50 20 35 32 32 31 30 29 % of adults 15+ with with service 15+ % of adults 0 Q1 2006 Q1 2008 Q1 2009 Q1 2006 Q1 2008 Q1 2009 Q1 2006 Q1 2008 Q1 2009 Q1

Overall Value for money Accessing the network Source: Ofcom technology tracker Base: All UK adults aged 15+ personally use mobile phone, Note: Includes only those who expressed an opinion

Switching levels fall

The proportion of fixed-line, broadband and mobile users switching provider in the last 12 months decreased in 2009 (Figure 4.78). This may be due to consumers committing to longer contract lengths in return for lower prices, for example:

• In the fixed-line market BT introduced inclusive evening calls for consumers on its Option 1 package who were prepared to commit to a 12-month rolling contract in April 2008.

• In the broadband market, BT’s Total Broadband packages are marketed as 18-month contracts, while a 24-month broadband and fixed-line contract from Carphone Warehouse includes the first six months free of charge.

• A higher proportion of mobile connections are now on pay-monthly contracts, and in Q1 2009 nearly three-quarters of new connections were on contracts of 18 months or longer (see Section 4.1.7)

258 Figure 4.78 Proportion of consumers who have switched provider in the last 12 months

Q2 2006 Q2 2007 10 Q1 2008 14 15 14 12 13 12 13 Q1 2009 10 10 8 9 6 % of adults of% 15+ with service 0 Fixed line Mobile Internet / Broadband* Source: Ofcom technology tracker Base: All UK adults aged 15+ with each respective telecoms service *Note: 2008 and 2009 data is the proportion of broadband consumers who had changed broadband provider in the last 12 months and is not directly comparable with 2006 and 2007 data which is the proportion of internet consumers who had changed internet provider. 2009 data is based on fixed broadband consumers only. Note that supplier switching when moving home is excluded from this data.

259

The Communications Market 2008

5 Converging Markets

261 Contents

5.1 Converging communications markets 263 5.1.1 Introduction 263 5.2 Content 265 5.2.1 Introduction and structure 265 5.2.2 The growing popularity of online catch-up TV content 265 5.2.3 The problem of unauthorised content sharing 273 5.2.4 The market for digital audio content 278 5.2.5 The market for video content 284 5.2.6 The market for user-generated content 285 5.2.7 The market for news content 291 5.2.8 Internet advertising 294 5.2.9 Conclusion 297 5.3 Distribution and devices 299 5.3.1 Distribution 299 5.3.2 Devices 303 5.3.3 Conclusion 313

262 5.1 Converging communications markets

5.1.1 Introduction

The term ‘convergence’ in communications markets is often used to describe the growing tendency for different content formats (audio, video, text, pictures) to reach consumers via a range of digital networks (the internet, mobile infrastructure, satellite, cable, digital terrestrial etc) and consumer devices (PC, TV, mobile etc.) This section looks at what these trends mean for the supply and consumption of communications content and services in the UK.

How content gets from creator to consumer

Content can travel in many ways from creator to consumer, and between consumers, but it follows the same general path, set out in Figure 5.1 below. In this report we use this pathway, or ‘value chain’, as our framework for thinking about developments in convergence.

Figure 5.1 Delivering content and voice services to consumers

Content Aggregation Distribution Devices Navigation Consumption

Section 5.2 Section 5.3.1 Section 5.3.2

The commentary in this section focuses on:

 Content – including the creation and packaging of content types where converging technologies have had a significant bearing (page 265).

 Distribution and devices – looking at the networks and devices over, and through which, consumers access content (page 299).

Each of these two sections groups together data which tell ‘stories’ within the overall framework of the convergence value chain.

263

5.2 Content

5.2.1 Introduction and structure

This section examines how converging technologies have reshaped the markets for a range of content types that, directly or indirectly, have a bearing on the industries that Ofcom regulates.

We begin by discussing the growing popularity of online catch-up TV content (Section 5.2.2, page 265). We consider the developments leading up to the more widespread adoption of online catch-up services, and analyse how and by whom these services are being consumed.

We then move on to consider the impact that digital networks have had on the distribution of audio-visual content. We discuss:

 the problem of unauthorised content sharing across peer-to-peer file-sharing networks (section 5.2.3, page 273);

 the market for digital audio content and how it has evolved since the introduction of digital downloads, and more recently online streaming (Section 5.2.4, page 278); and

 the market for video content and the share digital networks have of home-film consumption (section 5.2.5, page 284).

Converging technologies have challenged existing content types and brought opportunities to new ones. In this context, we consider:

 the market for user-generated content and the levels of engagement, creation, and consumption of it, in particular video sharing and social networking (Section 5.2.6, page 285);

 the market for news content and the difficulties facing existing providers relying on a declining source of revenue (section 5.2.7, page 291); and

 internet advertising and the growth of search (section 5.2.8, page 294).

5.2.2 The growing popularity of online catch-up TV content

2008: the year online catch-up TV began to go mainstream

2008 marked the first year that consumers demonstrated a clear appetite to watch long-form television programmes using the internet. All major public service, and some multichannel, broadcasters now offer a comprehensive selection of their channel schedules online, ranging from seven-day catch-up programming to archive material. Consumers can access this content through the internet (using a computer or hand-held device) or in some cases on their TV set, through a cable television or IPTV network.46

Figure 5.2 shows a simplified timeline of launches and re-launches of online catch-up TV services by the major broadcasters:

46 Viewers can also access catch-up TV through other means than online, notably digital video recorders (DVRs). We consider this further in section 5.2.2.

265 Figure 5.2 Simplified timeline of major online catch-up TV launches

Sky by 4OD iPlayer iPlayer Channel 4 Five Download C4 Broadband launches launches Public Catch-up rebranded as consolidates launches in trial beta launch streaming Demand Five 4OD and launch catch-up service

Q1 06 Q2 06 Q3 06 Q4 06 Q1 07 Q2 07 Q3 07 Q4 07 Q1 08 Q2 08 Q3 08 Q4 08 Q1 09 Q209

Itv.com rebranded Sky by as itvplayer Itv.com Broadband Five revamps relaunches Download Itv.com catch-up as Sky Sky player TV launches relaunch content Player launches Source: Ofcom based on broadcaster press releases.

Online catch-up services remained a relatively niche proposition until 2008, when a number of developments combined to improve consumer awareness and create a higher-quality, and more widely available, user experience:

 Increased availability and take-up of broadband connections sufficient to stream audio-visual content in real time. Ofcom research into broadband speeds found that average broadband speeds in the UK in April 2009 were 4.1Mbit/s and that 70% of broadband users receive average speeds of more than 2Mbit/s.47 The BBC recommends a minimum speed of 500kbit/s to use its iPlayer and 3.2Mbit/s to use its high-definition iPlayer service;

 New easy-to-use content delivery systems – initially the BBC and Channel 4 both used peer-to-peer (P2P) applications to distribute content, which introduced a delay in viewing while consumers downloaded programmes. But all the main broadcasters now offer streamed catch-up services, which provide more or less instant access. In addition, in December 2008 the BBC moved the iPlayer away from its P2P download distribution model to an HTTP download model (i.e. downloads direct from BBC servers rather than from other users).

 Widening access – both the iPlayer and Channel 4’s catch-up content were initially unavailable to consumers using either Apple Macs or computers running Linux. However, streamed iPlayer content became available for both platforms in December 2007, followed by downloaded content in December 2008. Channel 4 introduced Mac and Linux functionality in April 2009;

 Heavy marketing and cross-promotional campaigns from many of the largest UK broadcasters, including the BBC and ITV; and

 Distribution direct to the television set and to gaming consoles – customers of Virgin Media, BT Vision and Tiscali TV can now access catch-up content directly through their television set rather than through a computer. In addition, the iPlayer is also available via the Nintendo Wii and Sony Playstation 3, while BSkyB recently announced a deal to make its content available through the Xbox live portal from the autumn. Some smartphones such as the iPhone can also access the iPlayer.

47 See http://www.ofcom.org.uk/research/telecoms/reports/broadband_speeds/broadband_speeds/

266 Meanwhile, innovation in catch-up TV continues. The BBC was the first broadcaster to launch HD content via its catch-up service in April 2009, when it made the BBC HD channel available via the iPlayer. And there have been initial steps towards limited service aggregation – in October 2008 BSkyB announced a deal with the BBC to make iPlayer content available through its Sky Player service. BBC programmes are listed within existing Sky Player genres and consumers are then directed to the iPlayer website when they click on a programme.

Adoption of online catch-up TV is also increasing internationally. A notable example is Hulu, an American service offering free-to-view content set up by NBC Universal and News Corporation in March 2008, which ABC Disney subsequently joined. According to comScore data, Hulu grew from its launch in March 2008 to become the third most popular video site in the US by April 2009. In July 2009 Johannes Larcher, Senior Vice-president International of Hulu, announced that launching in the UK was Hulu’s number one priority.

Nearly a quarter of households use the internet to watch catch-up TV

Our consumer research (Figure 5.3) shows the growing impact of catch-up TV. Nearly one in four people with the internet at home (23%) claim that someone in their household watches catch-up TV online; this figure rises to one in three among 15-24 year olds. In general younger people and men are more likely to make this claim, possibly reflecting greater interest in, and familiarity with, the necessary technology, although among those aged 65+ the figure still stands at 10%. This may understate the true take-up of catch-up TV, as the data include only content watched online, and not over other platforms.

Despite this, it is important to remember that only a minority of people watch online catch-up TV. The reach of broadcast television is near-universal, while only 23% of adults with the internet (16% of all adults) live in a household where someone uses the internet to watch online catch-up TV. Furthermore, claimed use can differ from actual habits.

Figure 5.3 Proportion of adults with home internet who watch online catch-up TV

Proportion of households (%) 40% 33% 30% 26% 23% 24% 24% 21% 20% 14% 10% 10%

0% Total 15-24 25-34 35-54 55-64 65+ Male Female Source: Ofcom research Q1 2009. QE12 “Which, if any, of these do you or your household use the internet for whilst at home?”. Base: All adults who have the internet at home (2009, n=2116; 15-24 n=365, 25-34 n=415, 35-54 n=884, 55-64 n=262, 65+ n=189; male n=1025, female n=1091).

Most online TV viewing is being driven by the BBC’s iPlayer

Audience data from Nielsen Online show that in May 2009 the iPlayer reached nearly 15% of active UK internet users, more than double the figure 12 months previously. This was nearly

267 five times higher than its next largest rival, the ITV Player (3.3%), while the reach of the remaining major catch-up TV services stood at around 1% each.

The prominence and success of the iPlayer and the ITV Player may be related to the strength of the BBC and ITV brands in the eyes of consumers, and the fact that they carry some of the most popular programming shown in the UK. In the case of the iPlayer it may also reflect the resources that the BBC has devoted to developing the user experience; for instance, rolling out iPlayer content on games consoles and revamping the consumer interface in June 2008.

Figure 5.4 Active reach of major online catch-up TV services in the UK

Active reach (%)

15% BBC iPlayer

ITV Player 10% demand.five.tv

5% 4oD Catch Up

Channel 4oD 0% May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- skyplayer.sky.com 08 08 08 08 08 08 08 08 09 09 09 09 09 Source: Nielsen Online, home and work. Note: No figure available for 4oD catch-up in April 2009. ‘Active reach’ is the percentage of all active unique persons aged 2+ who visited the site or used the application. ‘Active’ is defined as anyone who used an internet-enabled computer within the time period.

35% of the unique audience for catch-up sites is typically under 35 – more for 4OD

The age profiles of users of the iPlayer, ITV player and Demand Five are similar, broadly following the breakdown of the UK active online universe, with around 35% of the unique audience for each site aged under 35. Within this there are some small differences; ITV Player attracts a slightly larger share of 18-24s, and iPlayer and Demand Five a little more of the 25-34 group.

But 4OD catch-up, Channel 4’s catch-up offering, has a very different age profile, with nearly 50% of its unique audience under 35, and 27% aged 25-34. This compares with the UK active online universe under-35 figure of 41% and 25-34 figure of just 17%. This difference is likely to be related to the younger age profile of Channel 4, and in particular to the presence of popular programmes aimed at young people and younger adults such as Hollyoaks. 4OD catch-up also has a smaller proportion of users aged 50-64 (18%). This is consistent with a lower than average audience in this age group for Channel 4’s linear broadcast offering.

268

Figure 5.5 UK audience profiles of PSB catch-up services, May 2009

Total unique audience 36.9m 5.24m 1.22m 0.36m 0.41m 100% 7% 9% 9% 9% 9% 65+ 23% 18% 80% 23% 25% 27% 26% 50 to 64 24% 60% 29% 31% 27% 31% 35 to 49 40% 27% 17% 25 to 34 16% 15% 17% 20% 11% 12% 10% 13% 12% 10% 18 to 24 13% 9% 9% 11% 8% 0% 2 to 17 Active iPlayer itvplayer 4OD catch- Demand Share of unique audience (%) audience of unique Share online up Five universe Source: Nielsen Online, home and work, month of May 2009. Note: Use caution for the 2-17 and 65+ age groups for 4OD catch-up and Demand Five due to low sample sizes. Active online universe = people aged 2+ who used an internet-enabled computer during the period.

Data provided to Ofcom by the BBC show that while there have been some small changes in the age profile of the adult iPlayer audience since its launch, the general picture has not changed significantly. The biggest change was the five percentage point drop in share for the 55+ age group between Q1 2008 and Q2 2009.

Figure 5.6 Age profile of PC iPlayer users over time

Share of audience (%)

100% 21% 20% 16% 16% 17% 16% 55+ 80%

42% 41% 38% 43% 60% 39% 43%

40% 35 to 54

45% 20% 38% 38% 41% 43% 41%

0% 15 to 34 Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Q2 2009 Source: BBC.

Data provided by the broadcasters indicate that people watch the different catch-up and on- demand services in different ways. (Unlike television audience measurement, these figures are not currently collected and published systematically, so comparisons should be made with caution). One example of this is that the majority of iPlayer content is viewed online, while TV is still the main vehicle for 4OD – we now examine this further.

The majority of iPlayer content is viewed online…

In the year after its launch (at the end of 2007) there were an estimated 372 million ‘requests to view’ iPlayer programmes (excluding radio programmes), or an average of over 1 million each day. Of these, the majority (around 275 million) were delivered over the internet and viewed over a PC, laptop, TV or hand-held device, with the rest served via Virgin Media (Figure 5.7).

269 Further BBC catch-up content would also have been viewed on BT Vision and Tiscali TV, but these are not included in the BBC figures below, as these platforms offer only a selection of BBC catch-up programmes, and not the full range of iPlayer content.

Figure 5.7 Monthly requests to view BBC iPlayer programmes, 2008

Cumulative requests Q1: 42m Q2: 120m Q3: 220m Q4: 374m 60 30/04 iPlayer launched on Virgin Media 41m iPlayer requests 40 35m online 31m

23m 21m 22m 20m 20m 21m 17m 16m 17m 20 14m 14m 11m 11m 12m 12m 12m iPlayer requests via Virgin Media 4m

0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: Ofcom, based on BBC data. Note: The BBC's iPlayer measurement system is not yet audited. It is working towards meeting industry standards for video and audio streaming and downloading. It is constantly working on its measurement systems and reserves the right to augment or change its methodology as the platform develops. Some figures for Virgin Media are estimates. This chart does not include content viewed via BT Vision or Tiscali TV.

…but consumers appear to view 4OD content more through their TVs

The 4OD content proposition differs from the BBC iPlayer, which is prevented by the BBC Trust from offering content more than 30 days old online; Channel 4, by contrast, now makes both catch-up (recently broadcast) and some archive content available free-to-view online (see introduction to section 5.2.2).

Figure 5.8 shows the cumulative requests to view 4OD programming in 2008. In contrast to iPlayer content, the majority of 4OD content is viewed through a TV service rather than online (so the charts are not strictly comparable). This may be partly because Channel 4 persevered with a less user-friendly desktop application model for longer than the BBC. Under this model, users downloaded software to their computers that they used to access and play content, rather than streaming it directly through a web browser. It could also be that the launch of the iPlayer on Virgin Media increased 4OD’s TV views, as consumers looking for iPlayer content discovered that Channel 4 programmes were easily available on the same platform.

270 Figure 5.8 Cumulative requests to view programmes on 4OD, 2008

Cumulative requests Q1: 32m Q2: 66m Q3: 97m Q4: 132m 8 7.4m 6.9m 6.6m 6.7m 6.5m 6.5m 6.5m 6.3m 6.3m 5.9m 6 5.5m 5.0m TV 4.7m 4.8m 4.1m 5.9m 5.1m 5.9m PC 3.8m 5.0m 4 3.3m 3.4m

0 Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec Source: Channel 4 Note: TV VOD includes Virgin Media and Tiscali TV.

While there are differences in the way consumers use the BBC iPlayer and 4OD – and how each is used compared to broadcast television – all three are united by a summer lull in viewing. The two online services saw a reduced rate of increase in cumulative requests to view in the summer months of 2008, before growth picked up again in September. This could be a result of people spending more time before the start of the new autumn television season.

Half of Virgin Media homes now use VoD – and they are using it more and more

With about 3.5 million subscribers (compared to c. 0.4 million for BT Vision and c. 0.1 million for Tiscali TV), many of the people able to access video on demand (VoD) through their television set are Virgin Media subscribers.48 Data from Virgin Media show that TV VoD reached more than half (52%) of Virgin homes in Q4 2008, an increase of five percentage points on Q4 2007. During the same period the total average number of monthly TV VoD views rose by 20 million to 53 million, driven by the increase in the user base and also by a 30% rise in average VoD views per user, to 30 per month.

Figure 5.9 VoD use in Virgin Media homes

VoD views per month/VoD reach 60 50 40 Q4 2007 30 53m 52% 47% 20 Q4 2008 33m 30 10 22 0 Average total VoD views Average VoD views per Average VoD reach per month month per user Source: Virgin Media, fourth quarter 2008 results press release

48 Consumers can also watch VoD on their television sets via the Nintendo Wii or Sony PlayStation 3.

271 Proposals for the next generation of online TV services

Several of the major broadcasters have sought to capitalise on the success of web-based TV services by developing new proposals seeking to develop the interface with the television set, improve content navigation or offer a ‘one-stop-shop’ for online catch-up TV content. In particular, two key proposals emerged in 2008 which have sought to move online viewing forward:

 Project Kangaroo – was a proposed commercial joint venture (JV) developed by BBC Worldwide, ITV and Channel 4. It planned to provide a service accessible to any UK consumer with a PC, carrying a broad range of catch-up, archive and other content. The JV partners believed that the service would benefit consumers, in particular, by making it easier for them to find content to watch online. In June 2008 the Office of Fair Trading referred Kangaroo to the Competition Commission (CC), which issued a final report blocking the service in February 2009 on the grounds that it was a threat to competition in the developing VoD market. Ofcom provided the CC and OFT with information and assistance in relation to their investigations. The CC noted that as the parties controlled the vast majority of UK-originated content this would put them in a strong position to restrict competition. The CC also considered that UK viewers might benefit from better VoD services if the parties – possibly in conjunction with other new and/or already-established providers of VoD – competed directly with each other. In July 2009 Arqiva, the transmissions operator, announced that it has agreed to acquire the platform assets of Project Kangaroo.

 Project Canvas – is a planned partnership between the BBC, ITV, BT and others to develop an environment for internet-connected television platforms, enabling the delivery of on-demand audio-visual content to television sets in the UK. The BBC Trust is currently reviewing the BBC’s involvement in the Canvas proposal and will publish provisional conclusions in autumn 2009.

Online TV aggregation

Apart from the BBC iPlayer (licence fee-funded) and Sky’s Sky Player TV (subscription, on- demand and ad-funded), a large amount of online catch-up TV is free-to-view and funded by advertisers. The latest industry estimates of the underlying revenue mix for audio-visual content delivered online reflect the importance of advertiser-funded content aggregation.

Screen Digest estimates that online TV services in the Entertainment, News and information, and Sports genres generated revenue of £48m in 2008 (excluding film, film trailers, music, adult content or programmes featured on user-generated content (UGC) sites). Of this, advertising revenue now stands at £22.1m, accounting for 46% of total online revenue, up from £4.9m in 2007.

272 Figure 5.10 Total online TV revenue

Revenue (£millions)

£50 £48.2m Advertising- £40 supported £22.1m £30 Subscription £20.6m £20 £4.9m £14.9m VOD £11.2m £10 £6.7m £2.3m £11.7m £3.5m £2.9m DTO £6.4m £8.4m £2.0m £7.7m £0 £2.8m £1.9m 2004 2005 2006 2007 2008

Source: Screen Digest media analyst consultancy Note: DTO = download to own.VOD = video on demand.

5.2.3 The problem of unauthorised content sharing

The digitisation of vast libraries of content, and the widespread availability of fast broadband networks are changing the ways in which content can be distributed and accessed. Consumers no longer have to purchase a physical disc or book but can instead access digital material online from a multitude of sources (both lawfully and unlawfully) using a number of technologies (such as streaming, direct downloads or peer-to-peer downloads).

In its Digital Britain report the Government proposed that Ofcom could have a role in addressing the problem of unlawful peer-to-peer file-sharing in the UK. In this context, the rest of this section provides an overview of unlawful file-sharing in the UK, highlighting recent initiatives to address the issue before looking in more detail at consumer behaviour, using a combination of consumer research and audience data. Subsequent sections look at the markets for audio and video which are particularly affected by unlawful file-sharing.

Digital content sharing attracts the interest of the Government’s Digital Britain report

Unlawful copying and distribution among some consumers affects all sections of the content value chain, and has prompted the Government to examine what might be done to address it. While unlawful copying has existed for some time (e.g. home taping and pirate videos), faster internet connections, greater media literacy, the ability to produce high-quality digital content reproductions and the ease of distributing such content have all coincided with growing public debate on unlawful file-sharing.

It is difficult to quantify the impact of unlawful file-sharing. Some industry representatives believe that it is now the dominant means of accessing content – for example, the International Federation of the Phonographic Industry (IFPI) claims that around 95% of all downloaded music is unauthorised49, and an LEK study for the Motion Picture Association put the UK film industry’s losses at over $1bn in 2005.50 But others put the figure lower, and its scale is likely to vary by content type (audio, film, software, games, audio-visual content etc).

49 The Digital Music Report 2009, IFPI, http://www.ifpi.org/content/library/DMR2009.pdf. 50 ‘The cost of movie piracy’, LEK/MPA, http://www.mpaa.org/leksummaryMPA%20revised.pdf.

273 A range of initiatives have been pursued by industry and Government to address the unauthorised sharing of content, including educational campaigns, legal action, a memorandum of understanding among key stakeholders, proposed legislation, and legal alternatives to file-sharing.

In July 2008, the Government, leading ISPs, the BPI (the UK record labels’ association) and the UK film industry signed a memorandum of understanding (MOU) to work towards reducing unlawful file-sharing. As part of this project the ISPs undertook to send informative letters to consumers suspected of unlawful file-sharing, but was ended on the publication of the interim Digital Britain report.

The Government’s Digital Britain report, published in June 2009 included proposals to give Ofcom a duty to take steps at reducing online copyright infringement, in particular by requiring ISPs to take specified action in relation to subscribers engaging in unlawful file- sharing51. The Government is currently consulting on aspects of these legislative proposals.

However, these initiatives are not unique to the UK. One example is the so-called ‘Loi HADOPI’ (sometimes referred to as ‘three strikes and you’re out’) in France, whereby those caught repeatedly downloading unlawfully could see their internet connection suspended. The first draft of these provisions was blocked by the Constitutional Court because the penalty would be imposed by a Government agency (HADOPI), not by the judiciary. The Senate then agreed a revised version of the law. This confers the power to order a suspension to a judge, who may decide the case in an accelerated procedure without further investigation, or hold a hearing on the basis of evidence provided to the public prosecutor by HADOPI. This revised law will now be considered by the National Assembly.

A number of new services have launched offering a legal alternative to unlawful file-sharing. Examples include free advertising-supported music-streaming sites such as Spotify and We7, and a deal between Universal and Virgin Media which offers consumers unlimited MP3 downloads from Universal’s catalogue (in return for a monthly fee), but threatens temporary suspension of internet access to persistent offenders who unlawfully distribute Universal’s material.

Copying physical discs and file-sharing used equally by those who regularly copy unlawfully

Uncovering attitudes and behaviour towards unauthorised content distribution is difficult, because consumers may be reluctant to disclose activities that they know to be unlawful, and some may not know which services are lawful and which are unlawful. But Entertainment Media Research (EMR) data suggest that concerns over file-sharing need to be seen in context. Among those who have ever accessed unauthorised content, the main method used for both video (26%) and audio (37%) is copying physical discs (Figure 5.11). This is followed by unlawful file-sharing, used by 25% for music copying and 21% for TV programmes and film.

However, if we look only at those people who say they regularly copy unlawfully, both copying methods are used a similar amount – implying that disc copying and file-sharing are equally serious concerns. No more than 5% of internet users fall into this camp, according to the EMR data - possibly reflecting a reluctance to admit the full extent of unlawful activities, but also perhaps pointing to a relatively small number of people being involved in high volumes of file-sharing.

51 For a full summary of the proposals see Chapter 4 of the final Digital Britain report at http://www.culture.gov.uk/images/publications/chpt4_digitalbritain-finalreport-jun09.pdf.

274 Figure 5.11 Incidence of accessing unauthorised content

Proportion who do activity (%)

0% 10% 20% 30% 40%

Allow others to copy CDs 5% 12% 20% 37%

Allow others to copy DVDs 4% 9% 13% 26%

Filesharing unauthorised music 5% 11% 9% 25%

Filesharing unauthorised movies/TV 5% 8% 8% 21%

Filesharing unauthorised games 3% 5% 8% 16%

Regularly Occasionally Rarely Source: Entertainment Media Research/Wiggin. Q: Please tell us whether you do any of these leisure activities? (Base: n=1512).

Audiences to file-sharing networks have fluctuated

Much of the public debate has focused on unlawful file-sharing as the chief means of distributing unauthorised content, and audio files as the type of content most-frequently shared unlawfully. But it is important to note that the P2P technology behind file-sharing can be used as a legitimate means of acquiring and distributing certain forms of content.

Two of the most popular means of file-sharing in the UK are LimeWire and the BitTorrent protocol. LimeWire is a piece of software which the user installs on their computer and which enables them to search, access, and distribute content, all within the same programme. In contrast, users of the BitTorrent protocol are required to search BitTorrent tracker websites to find content, which they can then access and distribute using one of a number of pieces of software (called BitTorrent clients).

Figure 5.12 Unique audiences of leading file-sharing sites and networks

6,000

5,000 Leading 4,000 filesharing networks and 3,000 websites

2,000 LimeWire

1,000 Unique Audience (000’s) Audience Unique 0 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- 08 08 08 08 08 08 08 09 09 09 09 09 09 Source: Nielsen Online Notes: (1) The unique audience of leading file-sharing networks and websites represents the number of users who have done at least one of the following: visited one of the five leading BitTorrent trackers; used one of the four leading BitTorrent clients; used Limewire.

Data from Nielsen Online show that the unique audience of leading P2P software and websites used for file-sharing has fluctuated throughout the year, but in June 2009 was very much the same as in June 2008 (-2%). However, the means by which users share files is

275 changing; in June 2008, LimeWire was used by 2.9 million file-sharers but by June 2009 the LimeWire unique audience had fallen by almost a third to 1.9 million file-sharers (Figure 5.12).

Figure 5.12 shows that an increase in the number of BitTorrent users is taking up the slack created by the decline in popularity of LimeWire for file-sharing. Between June 2008 and June 2009 the total amount of time spent by file-sharers on five of the leading BitTorrent tracker websites increased by 11.5% to 36 million minutes a month. However, the average time spent in a month by a user on at least one of these websites has declined in the same period by 7%, to 16 minutes 40 seconds. The time spent browsing for content on BitTorrent tracker websites displays a seasonal pattern, with more browsing occurring during winter months, peaking at Christmas time, with the least amount of time spent during the summer months, especially in July and August (Figure 5.13).

Figure 5.13 Time spent on leading BitTorrent trackers

60 30

50 25

40 20 Total minutes 30 15

20 10 Minutes per user Minutes per month per Minutes 10 5

Total minutes per month (millions) month per minutes Total 0 0 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- 08 08 08 08 08 08 08 09 09 09 09 09 09

Source: Nielsen Online Notes: (1) Tracker websites used here are The Pirate Bay, Mininova.org, isoHunt, TorrentReactor, and Torrentz. (2) Data in this chart only includes BitTorrent trackers and is incomparable with data in Figure 5.12.

However, the data in Figure 5.12 do not represent the total number of people engaged in unlawful file-sharing, because:

 it is impossible to tell what people actually use these sites and applications for – as people can use them for entirely legal purposes; and

 unique audience data tracks the number of unique users who access a site or application online. It does not track intensity of use – many people may click through once and never return; and

File-sharers claim that price and choice are the main reasons they download content unlawfully

Entertainment Media Research found that nearly half (48%) of those who engage in unlawful file-sharing content copying said that they would continue to access ‘free’ content for as long as it is available, and 45% thought that legal downloads are too expensive.

Choice was the other main issue cited by people who access unauthorised content in the survey. Thirty-eight per cent said they would pay for legal downloads if legitimate sites had what they wanted, while 32% complained that legal sites did not have the same content

276 range as illegal sites. It is also worth noting that a third (33%) of people who access unauthorised content say that they don’t know which sites are legal and which are illegal.

Nevertheless, it can be difficult to establish the real reasons behind consumer behaviour since surveyed opinions do not always reflect actual conduct, especially around a contentious issue like unlawful file-sharing.

Figure 5.14 Attitudes towards unauthorised content

Proportion of pirates who agree with statement (%) Total 0% 20% 40% 60% 80% 100% agree If free content available I will continue to access it 14% 34% 39% 7% 7% 48% Legal downloads are too expensive 19% 27% 39% 9% 6% 45% Would pay for legal d/ls if they had what I wanted 11% 27% 45% 10% 7% 38% Don't know which sites are legal/illegal 11% 22% 41% 17% 9% 33% Legal d/l sites don't have range of illegal sites 10% 22% 49% 11% 8% 32% I object to paying to download/stream content 9% 20% 46% 17% 8% 29% Don't think anyone suffers 7% 21% 49% 14% 9% 27% Don't think I'll be sued/prosecuted 7% 17% 47% 18% 11% 24% If caught there's not much they could do 7% 14% 47% 22% 10% 21%

Strongly agree Agree Neither agree nor disagree Disagree Strongly disagree Source: Entertainment Media Research/Wiggin. Q: Please tell us whether you do any of these leisure activities? (All pirating content, n=595).

Wishing to abide by the law is the main reason people don’t access unauthorised content…

Further data from Entertainment Media Research show that the reason most commonly given for not copying content unlawfully (Figure 5.15), is a desire not to break the law – cited by half of those who don’t do so, although this fell to 34% among 15-19 year olds. Younger people were also less likely to say that all of the content they want is available legally (13%).

Figure 5.15 Top five reasons why people don’t access unauthorised content

Proportion selecting each option (%) 0% 20% 40% 60%

34% 51% Don't want to break law 47% 54% 15-19 54% 19% 30% Not worth the hassle 40% 20-24 30% 36% 24% 33% 30% 25-34 Concerned about viruses and spyware 27% 28% 21% 26% Not fair to rightsholders 24% 35-44 29% 31% 13% 29% Everything I want is available legally 30% 45-54 26% 31% Source: Source: Entertainment Media Research/Wiggin. Q: Why do you not engage in online piracy? Please select all that apply. Base: all who don’t pirate (n=917).

277 …but younger people have fewer scruples about accessing content for free

A survey conducted by Human Capital provides further evidence of the attitude held by younger people towards the availability of music content; it suggests that two-thirds of 15- 24s think that downloading music for free is “morally acceptable”; while only four in ten believe that they should have to pay for the music that they want.

It is not clear whether this age group will continue to hold these opinions as they grow older – this may be a generational rather than a cohort effect. But it is possible that the content industry might respond to this, as Spotify has done, by developing legitimate but free-at-the- point-of access download or streaming services.

Figure 5.16 15-24s’ opinions on music content

Proportion answering yes/no (%)

0% 20% 40% 60% 80% 100%

Is it morally acceptable to 66% 34% download music for free?

Do you feel guilty for 30% 70% downloading music for free?

Do you think you should have to pay for the music you 39% 61% want?

Yes No Source: Youth and Music survey 2009, Human Capital/Marrakesh Records. Base: All 15-24 year olds (n=1026). Note: Excludes those who did not express an opinion.

5.2.4 The market for digital audio content

The music industry has been particularly affected by changes in modes of content distribution and consumption. In the context of the role that the Government has asked Ofcom to play in negotiations over unauthorised downloads of audio-visual material, and our wider interest as the regulator of the networks over which digital music content flows, we now set out an analysis of the market for digital music.

Accessing digital audio content Digital audio content is available in a variety of ways. Three of the most common include: direct downloads – full track downloads from pay-per download sites such as iTunes, eMusic or Amazon, or subscription services such as Napster; peer-to-peer (P2P) downloads – peer-to-peer file-sharing technologies include protocols, software and websites which enable users to download, among other things, audio content from one or a number of individuals simultaneously. Equally, these technologies enable the user to upload such content to other users on the same P2P network; and online streaming – music streamed directly over the internet in a browser (for example We7) or through a downloadable application (like Spotify). The content can be free-to-listen and supported by advertising, or accessible on a subscription or one-off fee basis.

278

Digital downloads begin to stem the decline in UK music sales

The total retail value of music sales continued to shrink in 2008, but at a declining rate. Screen Digest data reveal a 5% reduction in the retail value of music sales between 2007 and 2008 (Figure 5.17). This is substantially less than the 17% drop recorded between 2006 and 2007, helped by a slowdown in the decline in sales of physical music, offset by accelerating growth of digital music sales (Figure 5.18).

Figure 5.17 Value of retail music sales in the UK

-17% Growth (%YOY) -5% 1,600 1,400 1,200 1,000 800 £1,480m 600 £1,224m £1,156m 400

Retail revenue (millions) revenue Retail 200 0 2006 2007 2008 Source: Screen Digest

The mobile platform continues to play an important role in stimulating digital music sales. In a year that saw the launch of Nokia’s Comes With Music and the iPhone 3G, a third of digital music purchases were made over a mobile device during 2008, broadly in line with 2007 (Figure 5.18).

Figure 5.18 Physical and digital proportions of retail music sales in the UK 100% Digital £86m Digital £125m (+44%) 90% Digital £196m (+57%) Mobile £61m 80% 70% 60%

50% Physical Physical £1,394m £1,099m (-21%) Physical 40% £961m (-13%) PC £135m 30% 20% Proportion of retail revenue of retail Proportion 10% 0% 2006 2007 2008 PC/Mobile Split in 2008 Source: Screen Digest

Physical album sales continued to decline, but at a much slower rate, down by less than 10 million units in 2008 compared to more than 20 million units in 2007. Digital album sales went up by over 4 million, which helped stem the overall decline in album sales to less than 5 million units.

279 Digital distribution also helped fuel the growth in singles sales, which rose 33% year-on-year - physical sales now make up only 4% of the singles market. With album sales declining and singles sales growing rapidly, albums and singles are now beginning to head towards sales volume parity.

Figure 5.19 Music sales by volume, 2006 - 2008

162.3 Albums Singles 160 2.8 144.6 139.8 140 6.2 10.3 120 115.1

100 86.6

80 159.5 Digital 66.9 138.4 Physical 129.5 60 110.3 78 40 53.1 Sales volumes (millions of units) 20

13.8 8.6 0 4.9 2006 2007 2008 2006 2007 2008 Source: Entertainment Retailers’ Association yearbook 2009.

In 2008 consumers had more choice than ever before in the range of online stores from which they can download digital music, as Play.com, Tesco Digital, and Amazon all launched download services. And there has been innovation in pricing structures and purchase options, driven partly by partnerships between download stores and rights owners; Spotify announced in March 2009 that it had partnered with 7Digital to offer pay-per- download music, and in June 2009 Virgin Media announced a service which will offer unlimited downloads and streaming from Universal Music’s entire catalogue. Virgin Media also plans to offer an ‘entry-level’ service for consumers who may not want an ‘all you can eat’ product; Sky mooted a similar offer with Universal in July 2008 but further details have yet to appear.

However, Apple’s iTunes Store remains the largest digital music retailer in the UK, and according to the BPI’s annual statistics report accounted for 72% of all singles sales, and three-quarters of all digital albums sold in the UK. In January 2009, Apple announced that it would remove digital rights management (DRM - see The end of DRM section below), and introduced a new, tiered, pricing structure for single track downloads. These had historically been priced at 79p but now cost 59p, 79p or 99p, allowing record labels to charge a premium for the most popular ‘must have’ purchases.

280 The rise of DRM-free digital music The launch in 2008 of big brand-name digital music stores like Amazon, Tesco Digital, and Play.com all without digital rights management (DRM) software was the start of a shift towards DRM-free music amongst digital retailers. DRM-free music also appeared in the ‘all you can eat’ model of music consumption when Datz.com launched the Datz Music Lounge as a challenger to Nokia’s Comes With Music unlimited music offering.

However, the biggest shift towards DRM-free digital music occurred on 6 January 2009, when Apple, as the largest digital music retailer in the UK, announced that it had come to an agreement with the four major record labels - Universal Music Group, Sony BMG, Warner Music Group and EMI, as well as thousands of independents, to offer all music at the iTunes store DRM-free. Prior to this, Apple had had a deal with EMI, but with the new industry-wide initiative in place, more than 10 million DRM-free tracks now are available from the iTunes store.

The removal of DRM from Apple’s music library means that music purchased from iTunes can be played on any digital music player and not just Apple’s iPods and iPhones. In its annual summary of the recorded music and music publishing industries Enders Analysis commented that “the removal of DRM will improve the state of competition in the market for permanent downloads, since all stores become player-agnostic and all players become store-agnostic”52. Nevertheless, DRM is still seen by many as a possible enabler of future business models.

Pay-per-download remains most popular revenue model for music online …

Music revenue from pay-per-download and subscription download-to-own services totalled £134.8m in 2008, a 73% year-on-year increase. Pay-per-download sites such as iTunes and 7Digital generated the vast majority of this revenue (£125.4m). Subscription services such as Napster, which offer either unlimited or a fixed number of downloads in exchange for a monthly fee, generated £9.4m, up by 14% but continuing to fall as a proportion of total revenue.

Figure 5.20 Online music revenues

Revenue (£millions) CAGR (%) £140m £134.8m £9.4m 1yr 4yr £120m 14% 53% Subscription £100m £78.1m £80m £8.3m £60m £52.6m £125.4m £6.0m £30.2m 79% 120% Pay-per- £40m £69.9m download £4.6m £20m £46.6m £7.0m £25.6m £0m 2004 2005 2006 2007 2008

Source: Screen Digest Note: does not include revenues from ad-supported streaming sites.

52 Enders Analysis, “Recorded Music and Publishing”, 4 June 2009

281 ...but online streaming services emerge as an alternative...

Ofcom analysis based on Nielsen audience data (Figure 5.21) reveals Spotify’s rapid ascent during 2009, entering in March with three times the unique audience of competitor We7 and growing at an average of 25% per month to June 2009. However, We7 is rising strongly, with average growth of 38% a month over the same period. Last.fm remains the most popular free-to-listen music streaming service in the UK and has seen its unique audience rise by 48% in the last 12 months.

Figure 5.21 Unique audience of UK free-to-listen music streaming services

Unique Audience (millions) 1.4

1.2 Last.fm 1.0

0.8 Spotify 0.6

0.4 We7.com 0.2 0.0 Jun- Jul-08 Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- 08 08 08 08 08 08 09 09 09 09 09 09 Source: Nielsen Online Note: Due to a change in methodology, use caution for comparisons pre-October 2008.

The UK’s free-to-listen online streaming services Free-to-listen online streaming services such as Last.fm and We7 have existed for several years. Last.fm was founded in 2002 as a music recommendation service and personalised internet radio station. In January 2008 Last.fm’s business model evolved by allowing users to stream each track up to three times. Users of the premium subscription service pay a £3 monthly fee to remove advertisements from the website and to use other advanced features.

We7 was launched in April 2007 as an advertising-funded music download service, but announced a switch of focus to a music streaming model (underpinned by advertising) in October 2008. Tracks from all four major labels (Universal Music Group, Sony BMG, Warner Music Group, and EMI) can be accessed within the internet browser (without the need for a download or registration) and feature short 5-10 second ‘blipverts’ before the start of each song.

The most recent addition to the roster of UK free-to-listen music streaming services is Swedish start-up Spotify, which launched its subscription service in October 2008 after announcing a deal with the four major record labels. In February 2009 the ad-supported free version of Spotify was released from public beta trial phase and opened up to everyone in the UK. Unlike its competitors We7 and Last.fm, Spotify is not a browser-based service and requires users to install a downloaded application on their computer to stream music53. The free version of Spotify features 30-60 second audio advertisements about three times an hour, while the premium version at £9.99 a month removes the ads and offers content before its public release and exclusive competitions. Users of the free version can also purchase a £0.99 day-pass to remove adverts.

53 The Last.fm player is a client version of the Last.fm service, and this user experience is replicated on the Last.fm website.

282 While the number of people using free-to-listen music streaming services has risen over the past year, the majority of digital music listening on the PC occurs offline. In June 2009 iTunes and Windows Media Player (WMP) (the two main applications through which consumers can listen to digital music stored on their computer’s hard drive) attracted unique audiences of 7.1 million and 14.2 million respectively. In this context these figures show the number of people who opened and ran these applications on their computers and do not necessarily represent a connection to the internet or a website. The unique audience figures of iTunes and WMP far outweigh the number of users engaging with online music streaming services. Windows Media Player is the default media player, bundled with Microsoft’s operating system, while iTunes is required for those who own an iPod or iPhone.

Nevertheless, while Spotify’s audience might be smaller (although growing fast), the amount of time that its users spend on it is growing rapidly and is now higher than that of either WMP or iTunes. Over the past year the average user spent 1.5 to 2 hours per month on iTunes, while the comparable figure for WMP fluctuated between 45 minutes and an hour. But in Spotify’s first full month after public launch users spent nearly 3 hours on the service, and since then the average time spent has stabilised at around two hours 15 minutes. Users of free-to-listen streaming websites Last.fm and We7 use these music services for around 10 minutes per month (Figure 5.22).

Figure 5.22 Time spent using selected music services and media players

Time per person (hours) 3:00:00 Spotify

iTunes 2:00:00 Windows Media Player 1:00:00 Last.fm

We7.com 0:00:00 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- 08 08 08 08 08 08 08 09 09 09 09 09 09

Source: Nielsen Online. Note: (1) Due to a change in methodology, use caution for comparisons pre-October 2008. (2) Data are unavailable for We7.com between Jun-08 and Nov-08, and for Last.fm in June-08, because of insufficient sample size. (3) Data are unavailable before Mar-09 for Spotify because the service had not yet fully launched. (4) iTunes and Windows Media Player can be used to play media other than music.

It is important to stipulate that Nielsen Online’s methodology only counts genuine time spent on an application when it is ‘in focus’. This refers to the application to which keyboard and mouse activity is directed; only one application can be in focus at a time54. Furthermore, if the user remains inactive for 30 minutes or more the time accrued to the application ‘in focus’ is discounted to one minute after the last-recorded activity.

Because listening can occur while an application is ‘out of focus’ and because prolonged periods of inactive ‘in focus’ activity are discounted, the time spent on the media applications and music streaming websites, shown in Figure 5.22, does not represent actual time spent listening to music; it is likely to significantly understate it. But Figure 5.22 is useful in that it shows the time spent browsing, searching, and compiling music playlists, either on the music

54 Nielsen Online, “FAQ: NetView “Time Spent” Metrics”,

283 services or on media players. Longer periods of time spent on media players like iTunes and WMP suggest greater engagement with applications than with web-based streaming services like We7 and Last.fm. Spotify, however, attains greater engagement than either offline media players or web-based streaming services.

...and raise questions of access and ownership

The early success of Spotify has raised questions about the way people will consume music in the future. By providing unlimited access to music, rather than ownership, it offers a new way for many people to listen to the content they like. But it remains to be seen whether this unlimited access model will complement or replace the existing download model in the consumption of digital music. Is the model of free unlimited access to music sustainable, and is it one which consumers will choose in addition to, or substitution for, ownership?

Music licensing is an important cost element for services such as Spotify. Rates for online music streaming services fell in May 2009 after PRS for Music (the organisation that collects artists’ performance royalties in the UK) announced a reduction in the minimum payment per streamed track. Advertising revenues form an important revenue stream for some free-to- listen streaming services. But with advertising markets under pressure, industry players are also exploring other revenue opportunities such as premium service subscription providing advert-free and higher-quality streaming, or new mobile services. For example, Spotify announced in May 2009 that it is currently developing applications for mobile devices, access to which will be limited to premium subscribers.

5.2.5 The market for video content

Developments in the online film and video markets have a bearing on the markets for traditional broadcast based audio-visual content to the extent that they offer consumers new ways to access content.

The widespread adoption of multichannel TV, the launch of free-to-view film channels and the growing availability of broadband speeds of 2Mbit/s and over, enable films to be accessed from a number of different sources. And certain categories of films are increasingly available on demand, with established near-video on-demand services (nVoD or pay-per- view) such as Sky Box Office now joined by ‘true’ video on demand (VoD) provided by cable/IPTV operators (such as Virgin Media or Tiscali TV) and over the internet from providers such as iTunes and LoveFilm.com.

But nVoD and VoD only make up a small part of the home film market, according to the UK Film Council, accounting for £146m or 4.5% of the total revenue generated in 2007, up by 43% year-on-year. Internet-based VoD generated just £1m (Figure 5.23). This may be because:

 the market for online film VoD is still in its infancy and consumers may not yet be used to downloading film content;

 without a fast broadband connection downloading film content can take a significant amount of time;

 given the typical length of films, some consumers may prefer to watch film content in their living rooms; and

 some online revenues may be lost to unauthorised downloads and streams.

284

Figure 5.23 Share of home film market, 2006-2007

Growth (% YOY) Total market value £3103m +3% £3202m 100% £102m +43% £146m £1m Internet VoD

80% £1,066m -6.8% £994m TV VoD

60% nVoD and VoD £145m TV 40% £1,595m +11% £1,765m DVD/Video retail 20% DVD/Video rental £340m -13% £297m Share of home film market (%) market film home of Share 0% 2006 2007 TV/online split 2007 Source: UK Film Council/Ofcom based on Nielsen EDI, MRIB, BVA, Official Charts Company, Attentional, Screen Digest, RSU Analysis. Note: ‘TV’ is the market value of film content shown on pay-TV, terrestrial TV and free multi-channel TV. Pay-per-view is included in ‘nVoD’.

5.2.6 The market for user-generated content

The growth of user-generated content (UGC) has led to the availability of new content types (e.g. peer-review websites like Yelp.co.uk) and has encouraged a number of interesting new consumer behaviours. But it has also led to concerns about navigation, content quality, safety online and wider issues of media literacy that fall within Ofcom’s statutory remit.

UGC takes a variety of forms, but commonly includes blogs, photos, videos, audio, applications and web pages. Some UGC websites specialise in a particular type of content (for example Flickr, which is dedicated to photos and photo-sharing) while others allow the aggregation of several different content types (social networking sites and blogs are a good example of this).

Apart from social networking, engagement with UGC is changing little

Our research shows that only a minority of people engage with most types of UGC. The most popular activity is uploading photos to a website, which 43% of internet users claim to have done, while 38% have set up a profile on social networking sites such as Facebook and MySpace. We found only marginal increases from 2007 in the number of people saying they had tried most UGC activities, and a drop in their level of interest in trying them in the future – suggesting that the novelty factor has worn off. It is worth noting that social networking sites increasingly encompass several of the categories of UGC in the chart below.

285 Figure 5.24 Levels of interest in, or engagement with, user-generated content types

Done this Interested in doing this Not interested Don't know 2007 43% 18% 39% 1% Uploaded photos to a website 2009 43% 11% 44% 2%

2007 21% 10% 67% 2% Set up your own social networking page or profile 2009 38% 6% 54% 2%

2007 19% 10% 69% 2% Contributed comments to someone else’s weblog or blog 2009 20% 8% 70% 3%

2007 15% 17% 67% 2% Set up your own website 2009 15% 13% 71% 2%

2007 10% 10% 76% 3% Set up your own weblog/ blog 2009 12% 9% 77% 1%

2007 8% 11% 77% 4% Contributed to a collaborative website such as Wikipedia 2009 10% 10% 77% 3% 2007 10% 11% 77% 2% Made a short video and uploaded it to a website 2009 9% 7% 81% 2%

0% 20% 40% 60% 80% 100%

IN23A-I – I’m going to read out a number of things people might do online. Please tell me for each one I read out if you’ve done it, or you’d be interested in doing it, or not interested. Base: All who use the internet at home or elsewhere (1723 in 2007, 580 in 2009) Source: Ofcom media literacy research, fieldwork carried out by Saville Rossiter-Base in April to May 2009

Unsurprisingly, younger people were most likely to have engaged in creative UGC activities such as contributing to blogs or setting up websites.

Figure 5.25 Experience of creative activities, by age

65% 58% Uploaded photos to the internet 41% 34% 20% 68% Set up your own SNS page or 61% 32% profile 25% 8% 48% 16-24 Contributed comments to 38% 19% someone else's weblog/ blog 16% 10% 22% 25-34 16% Set up your own website 13% 13% 12% 22% 35-44 20% Set up your own weblog/ blog 10% 3% 7% 18% 45-54 Contributed to a collaborative 18% 5% 7% website such as Wikipedia 4% 19% 55+ Made a short video and uploaded 14% 5% it to a website 7% 3%

0% 20% 40% 60% 80% IN23A-I – I’m going to read out a number of things people might do online. Please tell me for each one I read out if you’ve done it, or you’d be interested in doing it, or not interested. Base: All who use the internet at home or elsewhere (580 aged 16+, 92 aged 16-24, 105 aged 25-34, 149 aged 35-44, 111 aged 45-54, 123 aged 55+). Source: Ofcom media literacy research, fieldwork carried out by Saville Rossiter-Base in April to May 2009.

286 According to data from Nielsen Online (Figure 5.26) some user-generated content sites are growing significantly, with Facebook in particular having overtaken both YouTube and Wikipedia in the last year as the site with the greatest number of unique users each month. However, most of the leading UGC communities appear to have stabilised with between 1 – 5 million users.

Figure 5.26 UK visitors to user-generated content sites

Unique audience (m) Growth (May 08 – May 09) 20m Facebook 73% YouTube 35% 15m Wikipedia 36% Blogger 32% 10m Myspace.com 5%

5m Bebo -17% WordPress.com 27%

0m Flickr 70% May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Photobucket 52% 08 08 08 08 08 08 08 08 09 09 09 09 09

Source: Nielsen Online. Note: Due to a change in methodology, use caution for comparisons pre October 2008. Bebo growth is from June 2008.

Video-sharing services

Video-sharing services aggregate video content, and let users stream clips free of charge. They are predominantly concerned with short-form content, although increasingly it is possible to find some longer-form content too. YouTube (owned by Google) is easily the most popular video-sharing service, with a unique audience of just under 16 million in May 2009, up 35% on the same period last year.

Figure 5.27 UK unique visitors to selected video-sharing sites

Unique audience (m) Growth May 08 – May 09 16m YouTube 35%

12m Google Video 138% MSN Video 99% 8m Metacafe 49%

4m Dailymotion 79%

-48% 0m Veoh May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- 08 08 08 08 08 08 08 08 09 09 09 09 09 Source: Nielsen Online. Note: Due to a change in methodology, use caution for comparisons pre October 2008. Annual growth calculated from May 08 – May 09.

YouTube is often characterised as a user-generated content site. But like several other video-sharing sites, it also includes a large amount of professionally-produced content, made available by studios, music labels and other content providers.

287 Figure (Figure 5.27) shows the top ten YouTube channels in the UK by number of views. All but two are channels owned by well-established content providers, and a large proportion of their content consists of music and other entertainment videos. A large number of channel views do not appear necessarily to lead directly to more subscribers – BBC Worldwide is only the fourth most popular channel but has easily the largest number of subscribers (people who elect to ‘follow’ certain channels by receiving notifications of new videos).

Figure 5.28 Popularity of YouTube channels in the UK

Number of views to (m) Subscribers to channel (m) 250 120 218.0m 211.0m 204.0m Number of views (m) Subscribers (000) 100 200 172.0m 151.0m 138.0m 80 150 130.0m 129.0m 116.0m 96.0m 60 100 40 50 20 0 0 Britain's Leona Parlophone BBC Polydor All Around ITN HDCYT Myredroom BBC Got Talent Lewis Worldwide the World Records Source: YouTube statistics 22 June 2009

Consumer research from Entertainment Media Research suggests that Comedy is the most popularvideo category on YouTube, watched by two-thirds of users on a regular basis.Music and Entertainment are watched by over half.

Figure 5.29 Most popular YouTube categories

Proportion who watch category on a regular basis 0% 10% 20% 30% 40% 50% 60% 70% Comedy 67% Music 56% Entertainment 50% Sports 33% Pets and animals 24% Film and animation 33% News and politics 16% Science and technology 15% People and blogs 16% Howto and style 12% Travel and events 11% Autos and vehicles 10% Education 10% Nonprofits and activism 5%

Source: Entertainment Media Research Base: all UK YouTube users (n=660).

Social networking maturing: metaphorically and literally

Social networking has been one of the fastest-moving stories in digital communications in the past four years, following the emergence of mass participation sites such as Facebook, MySpace and Bebo. But as the social networking phenomenon has begun to mature, it has started to develop in a different way.

288 In particular, social networking appears to be growing more popular among older age groups. The proportion of 25-34 year olds claiming to have a profile grew by six percentage points in the year to Q1 2009 to 46%, and among 35-54 year olds by eight percentage points to 35%. Conversely, there are signs that use of social networking sites may already have peaked among younger adults, with the proportion of 15-24 year olds with a profile down five percentage points over the year. However, it is important to note that our data doesn’t include children aged under 15, who will make up a substantial proportion of users. And the proportion of the AB socio-economic group claiming a profile has risen (up from 29% to 35%) while there was a substantial drop among DEs from 32% to 19%.

Figure 5.30 Proportion of adults who access social networking sites on the internet at home

100

80 Q1 2008

55 60 5050 46 Q3 2008 4039 35 35 36 40 32 3131 31 32 32 31 28 29 29 29 28 25 25 26 26 19 Q1 2009 20 141413 15 6 5 2 3 1 0 15-24 25-34 35-54 55-64 65-74 75+ AB C1 C2 DE Male Female QE12: Which, if any, of these do you or members of your household use the internet for while at home? Source: Ofcom technology tracker, Q1 2009 Base: All adults aged 15+ (n = 5812 Q1 2008, 1581 Q3 2008, 6090 Q1 2009)

Audience growth continues, but popularity is beginning to plateau

Data from Nielsen Online show that unique audiences to a number of social networking sites continued to grow last year, although not at the high historic rates of 2006 and 2007. We have already looked at the huge growth at sites like Facebook and YouTube, but there are also increases at some of the smaller and niche sites. LinkedIn, a site primarily used for business networking, saw its audience rise by 63%. But even more rapid was the growth of microblogging site Twitter, which now reaches 2.6 million users.

Figure 5.31 UK unique audiences of selected member communities

Unique audience (m) Growth (May 08 – May 09)

20m Facebook 73%

YouTube 35% 15m Myspace.com 5%

10m Bebo -17%

Friends Reunited 11% 5m Twitter.com 1679%

0m LinkedIn 63% May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Second Life -67% 08 08 08 08 08 08 08 08 09 09 09 09 09 Source: Nielsen Online. Note: Bebo growth is measured from Jun 08 – May 09.

289 Unique reach is only one measure of social network site popularity. Time spent on each site is as relevant - and is dominated by two sites. The average user now spends nearly six hours on Facebook each month, having grown from under four hours in May 2008. But the biggest change was for virtual world website, Second Life, whose users now spend an average of nine hours per month on the service, down from a recent high of nearly 28 hours, suggesting perhaps that part of the initial interest was driven by the novelty factor.

Figure 5.32 Time spent online, per UK user, on selected member communities

Time spent per person (hours)

22hrs Second Life 20hrs 18hrs Facebook 16hrs 14hrs Bebo 12hrs 10hrs 8hrs YouTube 6hrs 4hrs Myspace.com 2hrs 0hrs Twitter.com May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- LinkedIn 08 08 08 08 08 08 08 08 09 09 09 09 09 Source: Nielsen Online. Note: Due to a change in methodology, use caution for comparisons pre October 2008.

Twitter: from the Hudson River to the streets of Tehran

One of the most talked-about social networking developments of the past year has been the rise of the ‘microblogging’ service Twitter. Twitter enables users to post messages (or ‘tweets’) of 140 characters or less to their profiles and attach so-called ‘hash tags’ to their tweets to make them searchable. ‘Tweets’ can also be sent as mobile phone text messages.

Perhaps the most striking feature of Twitter was its almost overnight growth at the beginning of 2009. One possible reason for this is the role the site played in reporting the ditching of US Airways Flight 1549 in the Hudson River in January 2009. The first person to report the accident was a bystander who posted a photograph on Twitter of the aeroplane floating in the river. Subsequently many networks and news agencies picked up the story.

Since then the media have reported on the role of Twitter in other events including elections, breaking news stories and the recent disturbances in Iran. Although growth continues, Nielsen Online has reported that the number of users who abandon Twitter and its related applications after just one month (or its ‘attrition rate’) is around 60%.55

55 http://blog.nielsen.com/nielsenwire/online_mobile/update-return-of-the-twitter-quitters/.

290 Figure 5.33 Unique audience and active reach of Twitter

Unique audience (m) Active reach (%) 3.0m 8% 2.6m Unique audience Active reach 2.5m 7% 2.5m 2.4m 6% 2.0m 1.8m 5% 1.5m 4%

1.0m 3% 0.7m 2% 0.5m 0.2m 0.2m 0.2m 0.1m 0.2m 0.2m 0.1m 0.2m 1% 0.0m 0% May- Jun- Jul-08 Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- 08 08 08 08 08 08 08 09 09 09 09 09 Source: Nielsen Online. Note: Due to a change in methodology, use caution for comparisons pre October-2008.

5.2.7 The market for news content

Newspaper groups face similar challenges to some broadcasters, both relying on an advertising pool which is declining at present, and seeking to establish effective distribution models which maximise the benefits of the internet. The analysis below sets out a brief overview of recent trends relating to the provision of news content.

Newspaper advertising revenue fell in 2008

National, regional and local newspapers create, generate and gather content and aggregate it into branded print copies, podcasts, video streams and websites. Their business models are underpinned by a mixture of cover price revenue, display advertising (including colour supplements) and classified advertising.

The newspaper industry generated £4.1bn in advertising revenues in 2008, accounting for 25% of all UK advertising expenditure (Figure 5.34). In nominal terms this was down by 10.2% from 2007 and nearly £1bn lower than its 2004 peak of £5.1bn.

The reduction in revenue fell disproportionately on local newspapers. While national newspaper advertising revenue was down 6.6%, an average annual reduction of 1% since 2003, the decline among local press reached 15.8% on 2007 (and 5% average annual losses since 2003). This reduction is all the more significant because local papers rely more heavily on advertising than national papers; advertising makes up 44% of national revenues and 79% of local revenues.

291 Figure 5.34 National and regional newspaper advertising revenue

Revenue (£m) £5106m £4864m £4906m £5000m £4695m £4680m CAGR (%) £4118m 1 yr 3 yr 5yr £1974m £4000m £1902m £1912m £1913m £1933m -6.6 -1.9 -1.0 National £1805m £3000m

£2000m £3132m Local £2962m £2994m £2782m £2747m -15.8 -8.2 -4.8 £1000m £2313m

£0m 2003 2004 2005 2006 2007 2008 Source: The Advertising Association/WARC (www.warc.com) Note: All figures are nominal

As a result of these declines, regional newspapers’ share of total newspaper revenue dropped by three percentage points to 56% in 2008. Figure 5.35 shows how the decline in classified advertising in local newspapers makes up the bulk of the reduction in newspaper advertising spend in recent years, accounting for a drop of £615m since 2004. This is more than the decline in all the other components combined.

Figure 5.35 Changes in components of newspaper advertising revenue

Revenue (£bn) £5.2bn £5.0bn

£4.8bn £0.62bn

£4.6bn £5.11bn £4.4bn £0.20bn

£4.2bn £0.15bn £0.02bn £4.29bn £4.12bn £4.0bn Newspaper Local classified Local display National National display Newspaper advertising classified advertising spend 2004 spend 2008 Source: The Advertising Association/WARC (www.warc.com) Note: All figures are nominal.

Part of the decline in newspaper ad revenues may be explained by the recession, but the falls started before the current economic downturn, with wider structural change resulting from:

 the migration of classified advertising to the internet;

 changing consumer behaviour; and

 declining newspaper circulations.

Taken together, these changes have put a severe strain on some newspapers’ business models.

292

National newspaper circulations declined steadily in 2008

Newspaper reading is no longer a routine national pastime. Over the past four years circulation figures of the popular press have fallen on average by 3.2% per annum, while ‘quality’ newspapers have fared better, but still experienced average reductions of 1.3% per annum. And there are few winners – the circulation of all major UK newspapers fell in 2008 except The Sun (which was flat), and over four years only The Financial Times increased its readership.

Figure 5.36 Circulation of national newspapers

CAGR (%) 1 yr 4 yr Popular Press 9.4m 9.1m 8.8m 8.5m 8.3m -3.2 -3.2 Quality 2.6m 2.7m 2.6m 2.6m 2.5m -3.3 -1.3 Sun 4.00 0.0 -1.8 -3.6 -1.7 Daily Mail Daily Mirror 3.00 -6.6 -5.6 -3.7 -1.5 Daily Telegraph -4.9 -5.8 Daily Express 2.00 -6.9 -5.0 Daily Star -3.1 -1.5 Times 1.00 -0.7 0.6 Financial Times Average daily sales (m) sales daily Average -3.7 -1.7 Guardian -6.6 -3.1 Independent 0.00 2004 2005 2006 2007 2008 S ource: ABC/MediaTel/Ofcom.

The Guardian and The Telegraph attract the largest unique audiences online

In an effort to stem the decline in physical circulation, all major newspapers have developed online offerings. These do not just duplicate print editions but typically also include video and audio content. Newspaper groups have used a range of business models to support their online content, including advertising, subscriptions and pay-per-view, but most newspapers have free or mostly free websites.

293 Figure 5.37 National newspaper websites: unique audiences

Unique monthly audience (m) Annual 4.5 growth (% ) 4 45.3 Guardian.co.uk 3.5 61.3 Telegraph 3 114.0 MailOnline 2.5 79.9 The Sun 34.6 Times Online 2 120.8 Mirror.co.uk 1.5 55.5 The Independent 1 -1.7 FT.com 158.9 Daily Express 0.5 104.1 Daily Star 0 May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- 08 08 08 08 08 08 08 08 09 09 09 09 09 Source: Nielsen Online. Covers work and home internet access (most newspapers’ websites represent the daily and the Sunday paper). Note that annual growth is calculated from May 2008 to May 2009.

Audience data from Nielsen Online show that the leading UK newspaper websites come from The Guardian and The DailyTelegraph, each attracting over 4 million unique UK visitors every month during 2009. Nearly all national newspaper websites have experienced strong growth in the last year; with increases particularly notable among the popular and middle- market press. FT.com was the exception, losing 1.7% of its unique audience, perhaps a result of the restrictions it places on content access (in terms of both payment and registration).

5.2.8 Internet advertising

All of the content types discussed above depend, at least in part, on internet advertising revenues to support their business models. Internet advertising provides revenue for many of the operators we regulate – and can also compete for funds and challenge the business models of broadcasters and newspapers. The key website categories that offer free-to- access online content, funded at least in part by advertising, include:

 music streaming sites such as We7 and Spotify;

 online video sites such as Joost, ITV Player, 4OD, Demand Five, and (in the US) Hulu;

 social networking sites such as Facebook, MySpace and Bebo; and

 newspaper websites providing free-to-view access to elements of their print content.

Paid-for search continues to drive internet advertising revenue

Although many sites are pinning their hopes on securing sufficient online advertising revenue directly to their own site to make their businesses profitable, the data show that most online ad revenue accrues through paid-for search. This is advertising which appears alongside search results on sites such as Google, Bing and Yahoo! Search, and the big search engines take much of the revenue.

294 Figure 5.38 Internet advertising expenditure, by category

Growth 4 5 year Annual ) 3.3 CAGR

3 2.8 0.7 Other 21% 51% classified 0.6 2.0 2 0.4 1.4 2.0 Paid for 23% 58% 1.6 0.3 search 1 0.8 1.2

Advertising spend (£bn 0.5 0.2 0.8 0.2 0.1 0.4 0.6 Display 5% 30% 0.2 0.3 0.5 0.6 0 0.00.1 0.2 0.2 2002 2003 2004 2005 2006 2007 2008 Source: The Advertising Association/WARC (www.warc.com) Note: All figures are nominal

Figure 5.38 shows that paid-for search accounted for the majority of internet advertising revenue (60.6%) in 2008, and grew by 23%, faster than both display (5%) and other sources of classified advertising (21%).

Between 2003 and 2008 the internet’s share of total advertising expenditure rose from 3% to 20% (Figure 5.39). It is now the third most popular advertising medium after newspapers (25%) and television (23%), and on current trends looks set to rise to first position in the next few years, as happened in Denmark in 2008.

Figure 5.39 also shows the growth of the internet against newspaper advertising share. Since 2003, internet share has grown by 17 percentage points, while newspapers have fallen by eight percentage points during the same period. TV, radio, outdoor, cinema, magazine and direct mail advertising have also gone down, although by smaller amounts.

Figure 5.39 Share of advertising expenditure, by medium

Share of total advertising expenditure 100% Other 32% 30% 29% 80% 35% 34% 33% Radio 60% 3% 5% 8% 12% 16% 20%

25% 25% Internet 25% 24% 40% 24% 23%

Television 20% 33% 32% 30% 29% 27% 25% 0% Newspaper 2003 2004 2005 2006 2007 2008 Source: The Advertising Association/WARC (www.warc.com) Note: ‘other’ includes cinema, magazine, direct mail and outdoor advertising. All figures are nominal.

Search engines battle for market share

Search engines are popular and easy-to-use online navigation tools. According to Nielsen Online, 91% of people who used the internet in May 2009 visited a search site, an increase of three percentage points on May 2008.

295 Google is by far the most-used online search engine. Thirty-one million unique users visited Google in May 2009, which equates to 80% of UK internet users and 91% of those who used a search engine site. By comparison, the three biggest challengers to Google, Ask.com, MSN/Live Search and Yahoo! Search - each attracted around 7 million unique users.

The audience for search engines is still growing. Since May 2008 the total number of visitors to search sites has grown by 11%. It seems that much of the new growth is accruing to the established navigators, whose audiences all outpaced the 11% annual growth of the total audience to search sites - MSN/Live Search grew by 29%, Yahoo! by 27%, Ask.com by 23% and Google by 13%.

Figure 5.40 Unique audience of leading search engines

Unique monthly audience (millions) Annual Growth (%) 35 Total Search 11 30 25 13 Google Search 20 23 Ask.com 15

10 29 MSN/Windows Live Search 5 27 Yahoo! Search 0 May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- 08 08 08 08 08 08 08 08 09 09 09 09 09 Source: Nielsen Online, home and work use. Note: Annual growth calculated from May 08 to May 09.

Innovation in the search engine market has seen a number of re-launches and branding exercises over the past year:

 in October 2008 Ask.com re-focused its business as it sought to become the search engine of choice for those wishing to answer a specific query. Subsequently, in April 2009, Ask.com announced that it was reverting to its original name of AskJeeves in the UK, having previously scrapped this brand in 2006;

 in May 2009 Steve Ballmer, the CEO of Microsoft, announced that MSN/Live Search would be rebranded as Bing and would include several updated features such as real-time search suggestions as users enter queries. Early indications from comScore suggested that in the US at least, Bing has been successful in increasing share.

In addition, new types of search engine continue to emerge; for example, Wolfram Research’s Wolfram|Alpha which emerged in May 2009, and describes itself as a ‘computational knowledge engine’. It is based on the Mathematica software, also developed by Wolfram Research. Rather than providing a list of documents or links that match a search term, as most other search engines do, it attempts to answer factual queries directly by computing the answer from the data sources it holds. As an example, entering any date might provide famous anniversaries, times of sunrise and sunset, and the length of time to today’s date.

296 5.2.9 Conclusion

This section has examined how converging technologies have reshaped the markets for a range of content types that, directly or indirectly, have a bearing on the industries that Ofcom regulates.

Online catch-up TV has grown in popularity, helped by the increased availability and take-up of broadband connections, new easy-to-use content delivery systems, wider access across computer platforms, heavy marketing campaigns, and distribution direct to television sets and gaming consoles. Nearly a quarter of all households use the internet to watch catch-up TV, with most traffic directed towards the BBC iPlayer. Most BBC iPlayer content is viewed online in contrast to most of Channel 4’s 4OD content which is viewed on the television set.

The Government’s Digital Britain report includes proposals to address online copyright infringement, in particular by requiring ISPs to take specified action in relation to subscribers engaging in unlawful file-sharing. Of those who regularly access unauthorised content, copying physical discs and unlawful P2P file-sharing are equally the most popular. The unique audience of leading file-sharing networks has changed little overall despite fluctuations throughout the year and a shift in the P2P technology used by file-sharers.

Digital networks have affected the distribution of audio-visual content in a number of different ways. Physical music sales continue to decline, as do overall retail music sales, but at a slower rate bucked by strong growth in both digital album and digital singles sales. Pay-per- download remains the most popular revenue model for digital music, generating £125.4m in 2008 and growing 79% year-on-year. Online streaming services like Last.fm, We7 and Spotify continue to grow in popularity with users spending more time on Spotify than traditional offline media player software.

In the market for home film, video-on-demand from operators like Virgin Media and near- video-on-demand such as Sky Box Office generated 43% more revenue in 2008 than in 2007, but still only represented 4.5% of total home film market revenue.

Social networking continues to grow with 38% of consumers surveyed by Ofcom having set up a profile in 2009, a growth of 17 percentage points since 2007. Facebook is the most popular user-generated-content website (and social network), growing 73% between May 2008 and May 2009. YouTube is the second most popular UGC site and far more popular than competing video-sharing sites. Social networking audiences are maturing with significant growth in the 25-34 and 35-54 age groups. Microblogging network Twitter has received much media attention and grown massively since the start of 2009, but still has a reach of just 7% of internet users.

National and regional newspaper revenue continues to decline, but at an accelerated rate in 2008. The Financial Times and The Sun were the only national newspapers not to experience a fall in circulation. News content accessed online grew over the past year, with The Guardian and The Daily Telegraph attracting the highest unique audiences of national newspaper websites.

Paid for search grew 23% on 2007, driving the continued growth in internet advertising expenditure. Internet advertising now represents 20% of all advertising expenditure. Google remains the leader among search engines, attaining a unique audience greater than the sum of its rivals Ask.com, Yahoo! Search, and MSN/Windows Live Search.

297

5.3 Distribution and devices

Converging technologies allow consumers to receive different content types over the same distribution network, as well as receiving similar content over a range of different networks. Consumers can also access their content through a variety of different devices.

This section sets out a range of recent developments in the distribution of content over digital networks and the devices that are used by consumers to access it. It starts by looking at aspects of the distribution of content.

5.3.1 Distribution

Introduction and structure

This section examines the characteristics of a selection of digital distribution platforms in the UK. To avoid duplication, it does not repeat the analysis from 2007 and 2008 of platforms where there have been few or no developments. Instead, it looks at two important aspects of distribution networks in the UK:

 The availability of the main digital networks in the UK – showing how most UK consumers now have access to several different digital distribution networks (page 300).

 Developments in the use and management of spectrum in the UK – highlighting how spectrum underpins the delivery of wireless distribution networks, looking at recent spectrum auctions, and assessing developments in spectrum policy and future projects to develop the use of spectrum in the UK, through to the London Olympics in 2012 (page 301).

Network availability

Digital content can be distributed to consumers via a wide variety of networks. Across the UK most consumers now have access to several of the key broadcasting and telecoms networks, although availability varies according to the extent of network roll-out, population density and local topography.

Figure 5.41 shows that there has been little change since 2008 in the availability of the main digital networks in the UK. The only notable difference is the four percentage point increase in the number of households connected to an LLU exchange.

Availability of some platforms is likely to increase in the coming years. For example, as digital switchover continues, availability of digital terrestrial television will rise to around 90% for all six multiplexes (98.5% for the three public service multiplexes).

299 Figure 5.41 Availability of main distribution networks, 2008 and 2009

Platform availability (%)

2008 2009 100% 80% 60% 99.6% 98.0% 98.0% 98.0% 100.0% 40% 100.0% 100.0% 90.0% 90.0% 87.0% 84.0% 80.0% 73.0% 73.0%

20% 15.0% 15.0% 49.0% 49.0% n/a n/a 0% Fixed line 2G mobile 3G mobile DSL Cable LLU IPTV Digital Digital DAB digital broadband satellite TV terrestrial radio TV Sources: Ofcom and: 2G - Proportion of population living in postal districts where at least one operator reports at least 90% 2G area coverage. Sourced from GSM Association / Europa Technologies (Q1 2008). Note we have raised this threshold from 75% in 2008; as a result we do not have time series data. 3G - Proportion of population living in postal districts where at least one operator reports at least 90% 3G area coverage. Sourced from GSM Association / Europa Technologies (Q1 2008). Note we have raised this threshold from 75% in 2008; as a result we do not have time series data. DSL - Proportion of premises able to receive DSL services based on data reported by BT Cable - Proportion of households passed by Virgin Media’s broadband-enabled network LLU - Proportion of households connected to an LLU-enabled exchange IPTV - availability figure calculated on the assumption that Tiscali TV is now available in London, Stevenage, Birmingham, Newcastle and Edinburgh DTT - Availability of services from all six digital multiplexes DAB - digital radio coverage figure based on a Digital One estimate. Both the BBC and Digital One built new transmission masts during 2006/07

Developments in the use and management of wireless spectrum

Introduction

Spectrum underpins the delivery of all wireless communications services. Among other uses, it is an important means of distribution for content and voice services. As a finite natural resource, its use is coming under increasing pressure as the demand for wireless services grows.

Radio spectrum is the range of frequencies between 3 kHz and 300 GHz, and is part of the broader electromagnetic spectrum. Lower-frequency waves can travel over long distances and can penetrate buildings and objects without significant loss of signal, but offer limited bandwidth; the opposite is true at high frequencies.

The UHF (ultra-high frequency) band provides a balance between propagation range and bandwidth. This prime territory is well suited for delivering wireless connectivity to the consumer. The chart below illustrates this area within the broader context of spectrum.

300 Figure 5.42 Location and distribution networks across the radio spectrum

Source: Ofcom

During 2008 there have been several important developments in spectrum management, designed to increase the efficient allocation and use of spectrum in the UK. These are set out below.

Spectrum auctions

Ofcom held several spectrum auctions in 2008:

 40 MHz of spectrum in the 1452-1492 MHz band. Qualcomm, the eventual winner, paid £8.3m for the entire band. This spectrum can be used for a number of purposes including mobile TV and mobile broadband. As yet, Qualcomm has not released any details of its plans for this spectrum.

 Interleaved spectrum in the 542 to 550 MHz band went to Cube Interactive in Cardiff and in the 758 to 766 MHz band to Channel M Television in Manchester. Channel M are planning to launch a DTT service in addition to delivering programmes by cable, satellite and online. Cube Interactive are planning to develop a multi-tier service based on linear TV. A multi-tier service would use the spectrum available to Cube to deliver a variety of services that might include television and broadband.

 A pan-European process led to the award of spectrum at 1980-2010 MHz paired with 2170-2200 MHz to Inmarsat Ventures Ltd and Solaris Mobile Ltd. This will support mobile satellite services such as high-speed internet access, mobile television and radio or emergency communications across Europe, particularly to rural and less- populated regions.

Spectrum pricing

Ofcom encourages efficient use of spectrum by setting licence charges which reflect the costs of preventing the use of that spectrum by other users and uses. As part of this process

301 we simplified business radio licences in December 2008 by consolidating 21 licence classes into three products, with simplified terms and fees reflecting the opportunity cost.

Licence exemption

A number of important devices and services use licence-exempt spectrum, including Bluetooth, WiFi and baby monitors. As part of our efforts to increase the amount of available licence-exempt spectrum, we proposed in June 2009 to make much of the spectrum between 275 GHz and 3000 GHz exempt from the need for a licence (subject to some constraints and excluding some specific bands) after the World Radio Conference in 2011, at which this band will be discussed. This spectrum is mainly used by the scientific community (radio-astronomy, space research and earth exploration satellite services) for spectral line measurements. Other potential uses for the band include short-range anti- collision radar devices, the detection of skin cancer and evaluation tools used in industrial processes.

Enabling access to public sector spectrum

Following the 2006 Cave audit of public sector spectrum holdings56, the Government announced a far-reaching programme to use market mechanisms to promote the efficient use of public sector spectrum and the release of frequencies for commercial services. In January 2009, Ofcom made the first set of regulations to enable the MoD and other public bodies to release and acquire spectrum through the market, starting with the 406.1-430 MHz frequency band and certain bands used for radio astronomy.

Enhancing the value of spectrum through international harmonisation

We work with our European and international partners to make spectrum available on similar terms across a number of countries. This can enhance economies of scale, reduce interference, facilitate international roaming, and increase the value of the spectrum. Of particular note in this regard has been our work over the last 12 months to promote the development of harmonised technical conditions for use of the 800 MHz band for the provision of future mobile broadband services, and our recent decision to modify our own digital dividend plans to make this band available for new use in the UK.

Future projects to facilitate spectrum use in the UK

We are currently undertaking several significant projects to aid the efficient use of spectrum in the UK. These include:

 More spectrum for mobile and other services – through our digital dividend review (DDR) we are looking at what should happen to the spectrum freed up in the 470-854 MHz band by the transition to digital TV. We are also seeking to award spectrum in the 2500-2690 MHz band. Both these bands can be used for the provision of next- generation mobile broadband services. It is the view of Government, in its Digital Britain report, that there should be a co-ordinated approach to these bands.

 The PMSE ‘band manager’ – in July 2008 and June 2009 we proposed that spectrum used for programme-making and special events (PMSE) should be awarded via a beauty contest to a ‘band manager’. This beauty contest would use criteria designed to ensure that the band manager’s interests were aligned with those of PMSE users.

56 http://www.spectrumaudit.org.uk/

302  The London Olympics – Ofcom is responsible for ensuring that spectrum is available to meet the Government’s guarantees for the London 2012 Olympic Games and Paralympic Games. Preparations are being made for temporary use of spectrum by the Games organisers and participants, and for arrangements to satisfy the exceptional demand for wireless services which we expect in 2012. Ofcom began a consultation on the draft spectrum plan for the Games in May 2009.

Compression advances – more data using less bandwidth High-definition (HD) television is expected to be made available on the Freeview digital terrestrial service on a regional basis from December 2009, starting in the Granada region covering Manchester and Liverpool.

By making use of the latest transmission and compression technology, three HD channels – from the BBC, ITV and Channel 4/S4C – will be available at launch. A fourth, from commercial public service broadcaster Five, is expected to become available from late 2010.

The planned launch of HD has been made possible by using the latest transmission technology: DVB-T2, which has been developed by the Digital Video Broadcasting (DVB) standards body. DVB-T2 will be launched on Multiplex B, which will carry the HD channels, and should provide between 30% and 50% more transmission capacity than the current DVB-T technology. Multiplex B currently provides 18Mbit/s of capacity, but after the power increase and re-engineering for DVB-T2, it will be capable of delivering at least 32Mbit/s.

Pilot trials of DVB-T2 were under way at the time of writing. The final DVB-T2 transmission mode has not yet been selected, but it could provide 36Mbit/s of capacity, or even more, if capacity gains prove to be higher than expected. If this does happen, the Multiplex B capacity will have doubled its current bit-rate (amount of capacity). Broadcasters are also taking advantage of the latest compression technology to introduce HD on DTT. Currently, DTT services use the MPEG-2 video compression standard, but its latest iteration, MPEG-4, will be used to deliver the HD services. This requires around half the bit-rate of MPEG-2 encoding.

Consumers who want to watch the new HD services on DTT will need to buy new reception equipment, either a set-top box or an integrated digital Television (IDTV) that incorporates the MPEG-4 and DVB-T2 technology. Viewers will also need an HD-ready television set Freeview has said that the HD channels will be available to 60% of UK homes towards the end of 2010, up from 50% coverage expected by June 2010, in time for the football World Cup in South Africa.

5.3.2 Devices

Introduction and structure

This final section explores which converged devices consumers in the UK own and use. It does this by examining:

 Digital device take-up – access to most audio-visual devices continues to increase and while access to digital television, internet, and mobile is greatest among 35-44s, older consumers are increasingly adopting digital platforms (page 304).

 Broadening appeal of games consoles – nearly half of households had a gaming device in Q1 2009 (page 306);

303  The development of hybrid distribution devices – IPTV is being delivered by a number of hybrid devices, whilst traditional players in the market are being challenged by the ‘over-the-top’ approach to content delivery (page 307);

 The use of advanced mobile phone functions – more than half of consumers use their mobile phone to take and store photos but few consumers use the other advanced functions of their handsets (page 309);

 The take-up of wireless routers – half of all adults with broadband at home currently use a wireless router (page 311); and

 The take-up of e-readers – ebooks and e-readers remain a minority interest (page 312).

Digital device take-up

Take-up of most AV devices grows, but MP3 player ownership falls

Penetration of many digital devices continued to rise in 2008/09. Take-up of digital television now stands at 90%, and although growth slowed to 3.4% last year, it is likely to continue over the next couple of years as digital switchover gathers momentum. Take-up of digital video recorders (DVRs) grew fastest between Q1 2008 and Q1 2009 – 27% of consumers have access to a DVR, a 35% increase since Q1 2008. Growth may have been fuelled by the widening availability of Freeview+ devices and the substantial marketing and reduced cost of Sky+ devices.

By contrast, take-up of MP3 players fell year on year, by four percentage points to 41%. This came as the proportion of individuals with a 3G mobile phone rose from 17% to 22% over the same period. Part of the reason for the decline might be connected with the higher penetration of smartphones such as the Apple iPhone which includes an integrated music player and mass storage, removing the need for individuals to carry both a phone and an MP3 player.

Figure 5.43 A-V devices take-up

CAGR (%) Proportion of individuals (%) 1 yr 3 yr 100% 3.4 7.2 Digital television 80% 23.2 7.2 DVD player -3 35 Broadband 60% n/a n/a Games console 40% -8.9 -5.4 MP3 player 20% 24.2 43.1 DAB digital radio 35.0 27.6 DVR 0% 29.4 30.1 3G handset 2000 2001 2002 2003 2004 2005 2006 2007 Q1 Q1 2008 2009 n/a n/a Blu-Ray/ HD-DVD Source: Ofcom research. Note: The Question wording for DVD Player and DVR was changed in Q1 2009 so data are not directly comparable with previous years.

304 Access to digital television, internet and mobile greatest among 35-44s

Many people now have digital television, internet access and a mobile phone. But the proportion who have access to one, two or all three services varies by age. An Ofcom survey (305Figure 5.44) suggests that take-up of all three services is highest among 35-44 year olds (83%). Only in the 65+ age group do less than 50% have access to all three platforms; 13% of over-65s have none of them.

Figure 5.44 Take-up of DTV, mobiles and the internet, by age

Proportion of households (%)

100% All 3 platforms

32% Mobile phone & digital 80% TV 58% Mobile phone & 73% 75% internet 60% 79% 83% 26% Digital TV & internet

40% 2% Mobile phone only 7% 27% Digital TV only 20% 13% 15% 13% 13% 4% Internet only 7% 8% 2% 3% 4% 13% 5% 3% 4% 5% 0% 3% 2% None 16-24 25-34 35-44 45-54 55-64 65+ T1/ IN1/ M1 – Can any of your TV sets receive additional channels other than BBC, ITV, Channel 4/ S4C and (where available) Channel 5?/ Does anyone in your household have access to the internet at home through a computer or laptop?/ Do you personally use a mobile phone? Base: All adults aged 16+ (812 aged 16+, 106 aged 16-24, 126 aged 25-34, 173 aged 35-44, 140 aged 45-54, 106 aged 55-64, 161 aged 65+, 175 AB, 228 C1, 168 C2, 241 DE) Source: Ofcom media literacy research, fieldwork carried out by Saville Rossiter-Base in April to May 2009

Older consumers increasingly adopting digital platforms

Our research suggests that the gap in take-up between age groups is narrowing as technology take-up among older consumers grew the fastest during 2008. For mobile phone, DTV, and internet take-up, the largest growth in absolute terms between 2007 and 2009 was among the 65+ age group. The only other age group to see double-digit growth across all four platforms was the 55-64 year olds.

With many of these technologies now well established among many age groups, only access to the internet experienced double-digit growth across more than half of all age groups between 2007 and 2009.

305 Figure 5.45 Take-up of digital technologies, by age, 2007 and 2009

Change in take-up, 2007 - 2009 (percentage points) 16-24 25-34 35-44 45-54 55-64 65+ Mobile phone 3 0 0 2 11 17 DAB Digital radio 4 8 -3 6 13 11 DTV 5 0 4 11 12 12 Internet 13 13 11 7 10 15 100% Mobile phone 2009 Mobile phone 2007 80% Digital radio 2009 60% Digital radio 2007

40% Digital TV 2009

20% Digital TV 2007

0% Internet 2009 16-24 25-34 35-44 45-54 55-64 65+ Internet 2007 T1/ R1/ IN1/ M1 – Can any of your TV sets receive additional channels other than BBC, ITV, Channel 4/ S4C and (where available) Channel 5?/ In which of these ways do you ever listen to radio in your home?/ Does anyone in your household have access to the internet at home through a computer or laptop?/ Do you personally use a mobile phone? Base: All adults aged 16+ (106 16-24, 126 25-34, 173 35-44, 140 45-54, 106 55-64, 161 65+) Source: Ofcom media literacy research, fieldwork carried out by Saville Rossiter-Base in April to May 2009.

Games consoles broaden their appeal

In recent years games consoles have developed from devices designed only for game playing into multimedia centres at the forefront of device convergence which allow users to:

 watch audio-visual content on demand – including streaming and downloading films on demand and watching the BBC iPlayer;

 watch HD content using the Blu-ray and HD-DVD drives on Playstation 3 and Xbox360;

 download new content (such as audio-visual content or games) and extras to their console;

 play networked games and communicate and chat with other players; and

 watch live television, in the case of the Xbox 360.

Our consumer research shows that take-up of games consoles has increased steadily from just over a third (36%) of households in 2007 to nearly half (47%) in 2009. Penetration was highest among 15-24 year olds at 71%, and lowest for the 65+ age group (5%), although the fastest growth came among 25-44 year olds (up 11 percentage points) indicating that consoles are moving beyond their traditional market of younger people.

306 Figure 5.46 Access to games devices in the home, by age

Proportion of adults

80% 71% 63% 66% 55% 55% 60% 51% 47% 39% 38% 40% 36% 33% 29%

20% 2% 4% 5% 0% All 15-24 25-44 45-64 65+ Q1 2007 Q1 2008 Q1 2009

Source: Ofcom research, Q1 2009

The development of hybrid distribution devices

Games consoles with advanced convergent functionality are an example of an emerging new generation of hybrid devices. They seek to harness the benefits of multiple distribution networks to enable consumers to access a wide variety of content.

Perhaps the clearest example of hybrid distribution has been the efforts by equipment manufacturers and service providers to bring the benefits of on-demand access to the television set and radio receiver. They have done this by combining broadcast delivery of live content through a terrestrial or other network, with on-demand content delivered online, either via managed networks or the open internet. These hybrid devices have the potential to increase the popularity of services such as catch-up TV by extending their reach to a wider, less PC-literate audience.

Hybrid devices are superseding ‘pure’ IPTV offerings

Figure 1.48 shows the recent development of selected hybrid and on-demand audio-visual services. Operators initially focused their service launches either on relatively distinct IPTV (Kingston and Homechoice/Tiscali) or VoD services (Xbox Live, cable). More recently, however, hybrid services have sought to combine broadband content delivery with a complementary broadcast network (for example, BT Vision and the latest Tiscali set-top box). New entrants such as Fetch TV have also launched hybrid devices, and existing device makers such as Apple (Apple TV), Microsoft (Xbox 360), and Sony (Playstation 3) have included hybrid capabilities in their devices.

307 Figure 5.47 Timeline of selected hybrid and on-demand audio-visual services

Kingston Kingston Tiscali buys (2006) Broadband- Communicati Communications & rebrands (2007) enabled TVs ons launches ceases IPTV Homechoice as announced IPTV service service Tiscali TV at CES

Relaunch of Launch of Sky streaming Homechoice Fetch TV via Xbox live IPTV service announced

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Launch of NTL Telewest Launch of Launch of iPlayer CPW buys Xbox live launch VoD BT Vision Apple TV launches Tiscali UK on Wii

Play TV DTT tuner Project Canvas launched for PS3 announced Source: Ofcom

IPTV players being challenged by ‘over-the-top’ approach to content delivery

The details of each service vary from provider to provider (Figure 5.48). Where a device/service includes a broadcast element, it is usually provided through a DTT tuner (although Sky’s upcoming content on Xbox Live will use streaming technology).

For TV services over the internet, two broad technology approaches are emerging:

 ‘Quality of service-assured’: BT Vision and Tiscali TV both offer DTT set-top boxes which, in addition to receiving Freeview channels via the TV aerial, can also access on-demand content (and, in the case of Tiscali boxes without a Freeview tuner, linear TV channels) via a broadband connection. These services require the consumer to purchase their TV and broadband service from the same provider. Control over the broadband connection allows the operator to prioritise its on-demand content over internet traffic, and hence assure the technical quality of the service (QoS).

 ‘Over-the-top’: as broadband connections become faster and more reliable, and video compression efficiencies improve, there is greater potential to deliver video content directly to the TV set-top box without having to control the consumer’s broadband connection. Fetch TV has adopted this ‘over-the-top’ approach. Like BT Vision and Tiscali TV, the Fetch TV set-top box combines a Freeview+ DVR with on- demand programming from providers such as Paramount and National Geographic. The Fetch TV service is not tied to a particular internet service provider.

Currently operators of both QoS-assured and over-the-top TV services determine the range of online content that consumers can access. This ‘walled garden’ approach allows the operator to share directly in margins associated with supplying content rather than simply providing an access device. As the range of devices able to support over-the-top delivery proliferates, and as new business models develop and competition intensifies, it is possible that consumers will be able to access TV content from anywhere on the internet.

308 Figure 5.48 Comparison of selected hybrid distribution platforms, June 2009

Service Operator Description Hardware cost Other costs

Hybrid television service combining Subscription* (from BT Vision BT broadcast terrestrial TV via Freeview Free - £90 £14.68 per month), with on-demand IPTV otherwise pay-per-view IPTV service. Latest generation of set- Carphone Subscription* from Tiscali TV top boxes also include DTT tuners Free - £50 Warehouse* £19.99 per month and digital video recorder (DVR) DTT tuner and (DVR) combined with Pay-per-view (from Fetch TV IP Vision ‘over-the-top’ (i.e. unmanaged) online From £129.99 £0.49) on-demand content Digital media receiver that plays Pay-per-view (from Apple TV Apple content from iTunes store, selected From £195 £1.29) websites and owner’s PC hard drive Games console offering on-demand Pay-per-view from c. Xbox Live Microsoft capability through Xbox live network. From c. £150 £2.10 Sky TV available to stream autumn 09 Games console with optional DTT PlayStation 3 Sony tuner (Play TV) and DVR. On demand From c. £290 Pay-per-view from c. £2 content from PlayStation network TV streaming and placeshifting device Slingbox Sling Media that allows users to stream content From c. £69.99 N/A 37 remotely to a PC or mobile device Source: Ofcom *must be taken as part of a bundle with broadband and home telephony. Excludes introductory discounts. The European Commission approved Carphone Warehouse’s acquisition of Tiscali UK in June 2009.

Hybrid models also emerging for radio

The hybrid broadcast/broadband model has also recently been adopted by digital radio manufacturers such as Roberts and Pure. It is relatively common now for radio sets to have a dual DAB and FM tuner. But now certain models of DAB ‘kitchen’ radios can also access internet-based catch-up and streamed radio services using a WiFi connection. Due to the much lower bandwidth requirements of audio streaming, internet radio services all tend to be ‘over-the-top’, with no need for managed network quality.

The use of advanced mobile phone functions

Mobile phones are increasingly powerful portable media devices allowing consumers to undertake a wide range of activities in addition to traditional voice calling and text messaging. Smartphones such as the Apple iPhone, the Nokia N97 and BlackBerry Pearl accounted for 16% of all mobile sales in Q1 2009. But even mass-market phones increasingly include the ability to record video, download and play games, and store and listen to MP3 tracks. And as many new phones now include 3G and HSPA connectivity, more people are now equipped to take advantage of these faster data connections to download new content and applications and use the mobile internet.

But despite these increased capabilities, only a minority of consumers appear to use their handsets for functions other than voice calls (and voicemail) or text messaging; the only other function used by more than half of mobile phone users is taking and storing photos (52%).

309 Our research also shows that there has been little, if any, increase in the number of people claiming to use these mobile phone functions since Q1 2008. In fact, picture messaging and playing games actually declined, by six and five percentage points respectively.

Figure 5.49 Use of mobile phone functions

% point change from Q1 2008 % of people use mobile functions Any 90% +2 Text messaging 83% +4 Voice mail 56% -1 Take/ store photos 52% +/-0 Picture messaging 27% -6 Personal organiser 19% -2 Listen to radio/ MP3/ podcasts 19% -1 Play games 14% -5 Use IM/ chat function 13% +/-0 WAP 11% -1 Record video clips 10% -4 Send/receive video clips 9% -4 Emailing 7% +/-0 Download programs 7% +1 Watch TV/ video 4% -1 Access news/ sports news 4% -1 Video calling 2% -1 0% 20% 40% 60% 80% 100% Source: Ofcom research, Quarter 1 2009 Base: Adults aged 15+ who personally use a mobile phone (n= 5273)

Wireless routers

Half of all adults with broadband at home currently use a wireless router

During the initial years of broadband take-up, most people used a wired connection between their computer and phone socket. But more recently, as many households have acquired more than one computer and other broadband-enabled devices have become available, home networks have grown in importance. These include physical LAN networks and ‘powerline’ networks that use the mains wiring in the home to transmit data. But the most widespread are WiFi-based, allowing consumers to access their home broadband connection wirelessly within a radius of up to 100m from a wireless access point.

Most home WiFi networks operate in the 2.4GHz or 5GHz spectrum bands and conform to the IEEE 802.11 family of standards. A home network typically includes one or more network access points (often a wireless router) and one or more devices. Broadband providers often include free or subsidised wireless routers when customers sign up to a broadband contract.

Wireless routers may play an increasingly important part in home networking as technology and device connectivity improve and as the benefits of having a home network become more apparent. Ofcom technology research into the future of consumer entertainment in 2028 suggests that WiFi networks will continue to play an important role in the home in the future, and that the existing spectrum at 2.4 GHz and 5 GHz should be sufficient to meet increased demand for distributing entertainment content.57

Separate consumer research (Figure 5.50) shows consumer take-up of wireless routers over the past two years. Take-up has grown by 18 percentage points since Q1 2007 to reach

57 Entertainment in the UK in 2028, http://www.ofcom.org.uk/research/technology/research/sectorstudies/entertainment/entertain2028.pdf

310 52% of broadband households in Q1 2009. During the same period total broadband take-up has grown from 52% to 68%.

Take-up of wireless routers appeared to decline by five percentage points between Q3 2009 and Q1 2009. This outcome is likely to be due to two factors: a change in research methodology, and rising broadband penetration diluting the proportion of broadband customers using routers. Newer broadband customers may not yet be using a wireless network, may not need one or may not feel comfortable setting one up.

Figure 5.50 Use of wireless routers vs. take-up of broadband

100% 80% Currently use 68 80% wi reless 61 60% 57 router 52 53 60% 40% Total broadband 40% penetration (%) 57 52 44 20% 20% 34 41

0% 0% Q1 2007 Q3 2007 Q1 2008 Q3 2008 Q1 2009 Source: Ofcom research, Quarter 1 2009 Base: All adults 15+ with broadband at home (fixed and mobile) Note: From 2009 data based on those with fixed broadband connection

Devices – notebooks, netbooks and smartphones There was a time when the appearance of an electronic device was enough to let the user know what purpose it served. Apart from the different sizes and input methods, there was also a big difference in functionality: a PC was used to play games or create spreadsheets while a mobile phone was used to make calls.

Nowadays, in the era of convergence, calls can be made through a notebook using Skype and a smartphone can be used to edit a spreadsheet. You can play games and browse the internet on your TV or your mobile phone, and you can watch TV on your laptop. You can connect your PC to the internet via ADSL, or to a digital TV network, or even to a mobile network using a mobile phone or an integrated GPRS/3G/HSDPA modem. You can receive TV and radio broadcasts on mobile phones, and listen to the radio via the internet.

The convergence of communications and entertainment devices is so complete, and has been so rapid, that people may be confused about which device they should invest in. A mobile phone or a laptop?

The netbook fills the gap between the smartphone and the laptop; its name was popularised by Asus in late 2007 when it launched its Eee PC. Unlike other ‘bridge’ devices that have attempted to span the functions of several devices, netbooks have had tremendous success during the past two years and are increasingly becoming substitutes for laptops. The netbook’s shape is similar to the laptop’s, only smaller. Typical screen sizes range between 7” and 10”, while weight is usually around 1 kilo or less. Netbooks usually run a light version of a popular operating system such as Windows or Linux. It is interesting to note that Linux has captured a significant market share in the netbook segment, because its scalability and lower-cost licensing can bring down the cost of netbooks.

311 Typical uses for netbooks include office applications (word processor, spreadsheet), web browsing and communications (email, instant messaging) applications. Netbooks are usually equipped with wireless interfaces such as WiFi, 3G HSDPA or WiMAX. Storage capacity is usually (but not always) limited and is often provided via solid-state disks.

Several mobile operators offer netbooks in their mobile broadband bundles. While prices can vary widely, some can be acquired at no cost when purchasing a mobile broadband plan. Otherwise, a typical netbook costs around £250.

E-readers and ebooks are at an early stage of development

A new device that generated media and consumer interest in 2008/09 was the e-reader. These are large-screened portable devices that can store and ‘play’ digital books and potentially newspapers and other text-based content. Higher-end models have a WiFi or cellular connection to enable basic web browsing and content downloading. The major devices all have low-glare screens which mimic the appearance of printed text and, as such, allow the reader to use them for extended periods of time without the risks connected with back-lit screens.

Research from Entertainment Media Research and Wiggin shows that relatively few consumers (6% of internet users) currently use e-books, either on a dedicated e-reader or other portable device. A further 20% have heard of e-readers and expressed an interest in getting one, although as this survey is based on internet users it is possible that both these figures will be lower among the general population. It is clear that e-readers are still at an early stage in their development. There does not yet appear to be mass-market consumer appetite for them; 50% of consumers have heard of e-books but are not interested in them.

Figure 5.51 Interest in ebooks

Proportion of adults with internet access

100% Previously unaware 24% 26% 80%

60% Yes - heard of this but 50% 52% not interested 40%

20% Yes - heard of this and 20% 16% interested in getting one 0% 6% 6% E-book reader Reading E-books on mobile/other Yes - have this/currently do this portable device

Source: 2009 Digital Entertainment Survey from Entertainment Media Research/Wiggin Question: An e-book reader is a portable device that can store and play books in the same way that an iPod can store and play music. Do you own an e-book reader or have you downloaded any e- books? Base: UK adults 15+ (1,512) Note: This survey was based on an online survey that is representative of the national demographic, conducted in May 2009.

312 Ebooks: The story so far… More and more of the media we consume are becoming digitised and mobile: first audio, then video, and now the humble book. In the US, online retailer Amazon first launched the Kindle eBook reader in November 2007, along with the Kindle store which currently holds more than 300,000 ebooks, newspapers and magazines. Since then Amazon has released a further two models and in 2008 alone sold 500,000 Kindles. Furthermore, the ebook format has proved very popular, with 35% of sales titles that have an ebook edition sold in that format.

As yet the Kindle is unavailable in the UK, but other ebook readers have launched. Sony has partnered with high street retailer Waterstone’s, which sells Sony’s Reader in-store and eBooks online. Newcomer Elonex released its Elonex ebook device in a similar deal with retailer Borders. Other devices available in the UK include the French CyBook by Bookeen and the Dutch BeBook by Endless Ideas.

Furthermore, access to ebooks is not limited to just ebook readers. Amazon has already released a Kindle iPhone application and has announced that it will increase competition between devices by making Kindle books available on other mobile and computing devices. In the meantime, ebooks can already be read on many smartphones, gaming devices (such as the Nintendo DSLite), and even satellite navigation devices.

As with the digital music industry, ebooks come in a variety of formats, some of which employ open standards and others that are proprietary or have digital rights management (DRM) software included. This mix of formats decreases cross-compatibility between readers and can tie users to particular ebook retailers and hardware. However, in March 2009 Google announced that its library digitisation project Google Book Search would support Sony’s Reader device and contribute more than half a million titles in the open EPub format to Sony’s eBook Store. This brings Sony’s total number of books to double that of Kindle’s, and in a format which is compatible across a number of ebook readers.

5.3.3 Conclusion

Converging services and technologies play an increasingly important role in the wider communications markets and, therefore, the sectors we regulate.

The rate of change in these markets is increasing as consumers become more attuned to the potential benefits these services can offer and adopt these services in greater numbers.

2008 saw the rise of both catch-up and online TV as industry took advantage of the widespread availability of faster broadband and consumers demonstrated an appetite to take greater control over their viewing.

However, with new technologies come new challenges. Unlawful content sharing is becoming increasingly widespread and research suggests that two-thirds of people aged 15- 24 think it is morally acceptable to download music for free.

This has prompted industry and Government to look for ways to address the problem of unlawful content sharing through a range of initiatives, including educational campaigns, legal action, a memorandum of understanding between content owners and internet providers, proposed legislation and promotion of legal alternatives.

313

The Communications Market 2008

6 Annexes

315

Glossary

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 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 HSDPA).

3G LTE See LTE

3DTV Three-dimensional television. A television viewing system whereby a 3D effect is created for the viewer. The 3D image is generated using red and blue colour tints on two overlaid images intended for left and right eye. Some forms of 3D TV can involve the viewer wearing glasses (stereoscopic) but more advanced systems do not require glasses (autostereoscopic).

802.11 see Wireless LANs (WiFi)

Access network An electronic communications network which connects end-users to a service provider; running from the end-user’s premises 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.

ADS-RSLs Audio distribution systems restricted service licences. These licences are issued for broadcast radio services using spectrum outside the 'traditional' broadcast bands (i.e. FM and AM). Typically offering commentary and other information for attendees within a stadium or venue on specially-designed radio receivers for sale at the event (as they do not use standard broadcast frequencies).

Alternative operator Refers to service providers, usually in telecoms, other than the incumbent (or established) operator/s (see incumbent operator/s).

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 also used to refer to the medium frequency band (see MF, below).

ARPU Average revenue per user. A measurement used by pay-television or mobile companies to indicate the average monthly revenue earned from a subscriber.

317 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.

BARB Broadcasters Audience Research Board. The pan-industry body that measures television viewing.

Bit-rates The rate at which digital information is carried within a specified communication channel.

BitTorrent A peer-to-peer file sharing protocol which uses ‘trackers’ on websites to index content and is used by a number of BitTorrent clients to download and upload content.

Blipvert A short advertisement sometimes found in streamed or broadcast material, which is usually between five and ten seconds in duration.

Blog Short for weblog. A weblog is a journal (or newsletter) that is frequently updated and intended for general public consumption. Blogs generally represent the personality of the author or the website.

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 generally defined as being ‘always on’ and providing a bandwidth greater than narrowband.

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

Catch-up TV Usually refers to a services that allow consumers to watch or listen to content on a non-linear basis after the initial broadcast.

Communications Act Communications Act 2003, which came into force in July 2003.

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).

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 with whom they have a contract. CPS does not require the customer to dial a routing prefix or use a dialler box.

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.

Data packet In networking, the smallest unit of information transmitted as a discrete entity from one node on the network to another.

DCMS Department for Culture, Media and Sport

Digital Britain The Government report, published in June 2009, outlining a ‘strategic vision for ensuring that the UK is at the leading edge of the global digital economy’.

318 Digital switchover The process of switching over the analogue television or radio broadcasting system to digital.

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).

DRM Digital rights management. The technology that controls access and use of digital content.

Dongle A physical device, attached to a PC's USB port, which adds hardware capabilities.

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- 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 hand-held devices (the latter known as DVB-H). The DVB Project develops the standards.

DVB-T2. The latest digital terrestrial transmission technology developed by DVB. The technology is being used to facilitate the introduction of HDTV on DTT in the UK. DVB-S2 (satellite) and DVB-C2 (cable) are also available.

DVD Digital versatile disc. A high-capacity CD-size disc for carrying audio-visual content. Initially available as 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 disk drive which allows the user to record, pause and rewind live TV.

EPG Electronic programme guide. A programme schedule, typically broadcast alongside digital television or radio services, to provide information on the content and scheduling of current and future programmes.

E-reader An electronic, portable device capable of downloading and displaying text such as digital books or newspapers.

Fibre-to-the-cabinet 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 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 A form of fibre-optic communication delivery in which an optical fibre is run directly onto the customer’s premises.

319 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.

Format The type of programme service broadcast by radio stations. Also, the part of a radio station’s licence which describes the programme service.

Free-to-air Broadcast content that people can watch or listen to without having to pay a subscription.

GDP Gross Domestic Product.

GPRS General packet radio service, a packet data service provided over 2.5G mobile networks.

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.

GSM Global standard for mobile telephony, the standard used for 2G mobile systems.

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.

HSPA Jointly, downlink and uplink mobile broadband technologies are referred to as HSPA (High Speed Packet Access) services.

Incumbent operator/s An incumbent operator usually refers to a market’s established provider/s and in the case of the UK fixed market this is BT and Kingston Communications.

IDTV Integrated digital television set. A television set that includes a digital tuner (as well as analogue) and therefore does not require an additional set-top box to receive digital television. IDTVs are most commonly capable of receiving DTT but also digital satellite (Freesat).

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 allow 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. internet protocol), accessed by users with a computer via a service provider.

Internet-enabled mobile phone A mobile phone which allows its user to access the internet via in-built access technology such as GPRS or WCDMA.

IP (internet protocol) The packet data protocol used for routing and carrying messages across the internet and similar networks.

320 IPTV Internet protocol television. The term used for 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. Typically used in the context of streamed linear and on-demand content, but also sometimes for downloaded video clips.

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.

ISP Internet service provider. A company that provides access to the internet.

ITC Independent Television Commission, one of the regulators replaced by Ofcom in 2003

ITV licensees ITV Broadcasting Limited, STV, UTV and Channel Television.

ITV All references to ITV1 should be read as including STV, UTV and Channel Television.

LAN (Local area network) A network for communication between computers covering a local area, like a home or an office.

L-Band A range of frequencies within which an allocation has been made in much of the world for broadcasting (1452 to 1492 MHz), generally by satellite, but in Europe for terrestrial digital sound broadcasting in the range 1452 to 1480 MHz. Some DAB digital radio receivers can tune to this range.

Leased line A transmission facility which is leased by an end user from a public carrier, and which is dedicated to that user's traffic.

LLU (local loop unbundling) LLU is the process where the incumbent operators (in the UK it is BT and Kingston Communications) make their local network (the lines that run from customers 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.

L-RSL See also S-RSLs – Long Term Restricted Service Licences. L-RSLs are a means of providing a radio service for a non-resident population within a defined establishment such as hospital patients and staff, students on a campus, or army personnel. They are available on demand, provided they meet the licensing criteria and that a suitable frequency is available. Licences are renewable after the initial five-year term.

LTE (Long-term evolution). Part of the development of 4G mobile systems that started with 2G and 3G networks.

Microblogging Short-form blogging. The term is commonly associated with the Twitter service, on which messages are no longer than 140 characters.

MMS Multimedia Messaging Service. The next generation of mobile messaging services, adding photos, pictures and audio to text messages.

Mobile Broadband Various types of wireless high-speed internet access through a portable modem, telephone or other device.

321 MP3 (MPEG-1 Audio Layer-3) A standard technology and format for compressing a sound sequence into a very small file (about one-twelfth the size of the original file) while preserving the original level of sound quality when it is played.

MP3 player A device that is able to store and play back MP3 files.

MPEG Moving Picture Experts Group. A set of international standards for compression and transmission of digital audio-visual content. Most digital television services in the UK use MPEG2, but MPEG4 offers greater efficiency and is likely to be used for new services including TV over DSL and high-definition TV.

Multichannel In the UK, this refers to the provision or receipt of television services other than the main five channels (BBC One and 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.

MW See MF and AM above.

Narrowband A service or connection providing data speeds up to 128kbit/s, such as via an analogue telephone line, or via ISD.

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.

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) New or upgraded access networks that will allow substantial improvements in broadband speeds and quality of service compared to today’s services. This can be based on a number of technologies including cable, fixed wireless and mobile. Most often used to refer to networks using fibre optic technology.

Oftel Office of Telecommunications, whose functions transferred to Ofcom on 29 December 2003.

Pact Producers Alliance for Cinema and Television, the UK trade association for independent film, television, animation and interactive media companies.

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.

Peak time 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-

322 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 (P2P) distribution The process of directly transferring information, services or products between users or devices that operate on the same hierarchical level.

Podcasting A way for digital audio files to be published on the internet, and then downloaded onto computers and transferred to portable digital audio players.

‘Pull’ VOD A video-on-demand system where content is delivered in real time to the viewers. The approach is usually favoured on platforms that have a high-speed return path, such as cable or IPTV

‘Push’ VOD A video-on-demand system where content is downloaded to the hard disk of a set-top box rather than streamed in real time via a wired network. The approach is usually favoured on platforms that do not have a high-speed return path, such as satellite or terrestrial.

PSB Public service broadcasting, or public service broadcaster. The Communications Act in the UK defines the PSBs as including the BBC, ITV1 (including GMTV1), Channel 4, Five and S4C.

PSTN Public switched telephone network. The network that manages circuit-switched fixed- line telephone systems.

PVR See DVR

RAJAR Radio Joint Audience Research – the pan-industry body which measures radio listening.

RSL Restricted service licence. A radio licence serving a single site (e.g. a hospital or university campus) or serving a wider area on a temporary basis (e.g. for festivals and events).

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.

SIM (Subscriber Identify Module) A SIM or SIM card is a small flat electronic chip that identifies a mobile customer and the mobile operator. A mobile phone must have a SIM card inserted before it can be used.

SIM-only A mobile contract that is sold without a handset.

Share (radio) Proportion of total listener hours, expressed as a percentage, attributable to one station within that station’s total survey 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.

323 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).

SME Small to medium-sized enterprise. A company with fewer than 250 employees.

Social networking site (SNS) A website that allows users to join communities and interact with friends or to others that share common interests.

S-RSLs Short-term restricted service licences (S-RSLs) are issued for temporary local radio stations which usually serve a very localised coverage area, such as an education campus, a sports event, or a music or religious festival site. These licences are also used for temporary trials of community stations, sometimes to gauge interest before applying for a five-year community licence.

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.

Telecommunications, or 'telecoms' Conveyance over distance of speech, music and other sounds, visual images or signals by electric, magnetic or electro-magnetic means.

Time-shifting The broadcasting of a television service on more than one channel with a specified delay (typically an hour), to provide more than one opportunity for viewers to watch the service. Alternatively, the recording of programmes by viewers (using DVRs, recordable DVDs or VCRs) to watch at another time.

Transmitter A device which amplifies an electrical signal at a frequency to be converted, by means of an aerial, into an electromagnetic wave (or radio wave). The term is commonly used to include other, attached devices, which impose a more simple signal onto the frequency, which is then sent as a radio wave. The term is sometimes also used to include the cable and aerial system referred to above, and indeed the whole electrical, electronic and physical system at the site of the transmitter.

TSA Total survey area. The coverage area within which a radio station’s audience is measured by RAJAR.

TV over DSL/TV over broadband A technology that allows viewers to access TV content – either in a linear programme schedule, or on demand – using internet protocol via broadband services, either on a PC or (via a set-top box) on a TV set.

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. TVWF was replaced by the Audio Visual Media Services (AVMS) Directive in December 2007.

UMTS Universal mobile telecommunications system. The 3G mobile technologies most commonly used in the UK and Europe.

Usage caps Monthly limits on the amount of data which broadband users can download, imposed by some ISPs.

Unique Audience The number of different people visiting a website or using an application.

324 UWB Ultra-wideband A technology developed to transfer large amounts of data wirelessly over short distances, typically less than ten metres.

VCR Video cassette recorder.

VHF Very High Frequency The part of the spectrum between 30 MHz and 300 MHz. FM radio is broadcast on part of this band (87.6 MHz to 107.9 MHz) and DAB digital radio is broadcast on another (Band III: 217.5 MHz to 230 MHz in the UK, and over a wider range, but shared with TV services, elsewhere in Europe).

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 see ‘push’ VOD and ‘pull’ VOD.

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.

WAP Wireless application protocol.

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.

Widget Widgets are small chunks of code embedded on desktops, web pages and mobile phones to enable content to be distributed.

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.

XHTML (Extensible HTML) A mark-up language for Web pages from the W3C. XHTML combines HTML and XML into a single format (HTML 4.0 and XML 1.0).

325 Table of Figures

Figure 1.1 Digital communications service availability, 2007 and 2008 ...... 15 Figure 1.2 Digital technology adoption, Q1 2008 and Q1 2009 ...... 16 Figure 1.3 Communications industry revenue ...... 17 Figure 1.4 Average monthly household spend on communications services ...... 17 Figure 1.5 Average time per day spent using communications services ...... 18 Figure 1.6 Overall satisfaction with communications services ...... 19 Figure 1.7 Bundled service offers from major suppliers ...... 19 Figure 1.8 Bundled services by consumer, by type ...... 20 Figure 1.9 Which media activity would consumers miss the most ...... 21 Figure 1.10 Proportion of households using the internet for listed activities ...... 22 Figure 1.11 UK GDP quarterly growth, Bank of England base rates and unemployment 24 Figure 1.12 Consumer attitudes towards the recession ...... 25 Figure 1.13 Items where consumers are most likely to cut back their spending ...... 26 Figure 1.14 The communications service where consumers would be most likely to cut spend ...... 27 Figure 1.15 Consumers’ agreement/disagreement that they were more likely, in the context of a recession, to take communications services in bundles ...... 28 Figure 1.16 Consumers’ propensity to renew their handset now, compared to 12 months ago ...... 29 Figure 1.17 UK sales of mobile handsets ...... 29 Figure 1.18 Increased likelihood of consumers keeping/taking out a pay-TV subscription now versus 12 months ago ...... 30 Figure 1.19 Proportion of consumers becoming more conscious over the last 12 months of their spending on a variety of communications services ...... 30 Figure 1.20 Proportion of consumers agreeing that providers offer better deals now than a year ago ...... 31 Figure 1.21 Consumers who are more likely to shop around for their communications service now than a year ago ...... 32 Figure 1.22 Media and telecoms share performance against FTSE 100 ...... 33 Figure 1.23 Revenue trends in the TV, telecoms and radio sectors ...... 33 Figure 1.24 Proportional changes in sector revenues, 2007 - 2008 ...... 34 Figure 1.25 Net advertising revenues among television broadcasters ...... 35 Figure 1.26 Multichannel NAR ...... 36 Figure 1.27 Advertising spending, by sector ...... 36 Figure 1.28 Post-pay mobile sales, by length of contract ...... 37 Figure 1.29 Pre-pay and contract mobile subscriptions...... 37 Figure 1.30 DVR take-up ...... 41 Figure 1.31 UK DVR sales/rentals, Q1 2003 – Q1 2009 ...... 41 Figure 1.32 Proportion of live and recorded viewing across five PSB channels ...... 42 Figure 1.33 Proportion of live versus recorded viewing, by age, 2008 ...... 43 Figure 1.34 Proportion of live versus recorded viewing, by socio-economic group ...... 43 Figure 1.35 Proportion of live versus recorded viewing, by platform, 2008 ...... 44 Figure 1.36 Daily TV viewing in Sky+ homes, live and recorded, Jan - May ...... 44 Figure 1.37 Daily TV viewing in Sky+ homes, live and recorded, adults 16 - 34, Jan-May ...... 45 Figure 1.38 Whether DVR ownership has changed amount of TV viewing ...... 45 Figure 1.39 Most-recorded channels in Sky+ homes, Jan-May 2009 ...... 46 Figure 1.40 Programme genres most likely to be recorded ...... 47 Figure 1.41 Proportion of live versus recorded viewing, Sky+ homes ...... 48 Figure 1.42 Popular recorded shows, series average, Sky+ homes, Jan-May 2009 ...... 49 Figure 1.43 Time between recording and playback of programmes in Sky+ homes ...... 49 Figure 1.44 Whether viewers fast-forward adverts with DVRs ...... 50

326 Figure 1.45 Agree – ‘I watch a greater variety of programmes since getting my DVR’ .... 51 Figure 1.46 Share of Sky platform viewing: Skellig (one-off drama) ...... 52 Figure 1.47 Personal recording capacity of current-generation DVRs ...... 53 Figure 1.48 Availability of communications infrastructure in 2009 ...... 56 Figure 1.49 Technology adoption across the UK, Q1 2009 ...... 57 Figure 1.50 Digital television and broadband take-up in the nations’ largest cities ...... 58 Figure 1.51 The prevalence of and type of service bundling, by nation ...... 59 Figure 1.52 Proportion of individuals taking a discounted bundle, Q1 2009 ...... 59 Figure 1.53 Spend per head on UK-originated content by PSBs on TV and radio ...... 60 Figure 1.54 Hours of daily television viewing and radio listening, by nation ...... 61 Figure 1.55 Consumers’ use of converging platforms ...... 62 Figure 1.56 Main means of making telephone calls ...... 63 Figure 2.1 Changes in television industry revenue, 2007 - 2008 ...... 69 Figure 2.2 Net advertising revenues ...... 69 Figure 2.3 Multichannel revenue by source: NAR and other revenue ...... 72 Figure 2.4 Multichannel television take-up ...... 73 Figure 2.5 UK households and switchover dates ...... 74 Figure 2.6 Number of broadcast HD homes: BSkyB, Virgin Media and Freesat ...... 75 Figure 2.7 Comparison of high-definition TV services ...... 76 Figure 2.8 HD-ready TV sets: sales ...... 76 Figure 2.9 Channel genre analysis in multichannel homes ...... 78 Figure 2.10 Changes in genre share, multichannel homes: 2003 - 2008 ...... 79 Figure 2.11 Television channel licences issued ...... 79 Figure 2.12 UK channel licence awards, by genre, 2007 - 2008 ...... 80 Figure 2.13 Total TV industry revenue, by source ...... 82 Figure 2.14 Total TV industry revenue, by sector ...... 83 Figure 2.15 Net advertising revenue, by sector ...... 84 Figure 2.16 TV advertising market share, 2008 ...... 84 Figure 2.17 Breakdown of non-broadcast and other revenue, 2008 ...... 85 Figure 2.18 Multichannel broadcasters’ revenue in key channel genres, 2008 ...... 86 Figure 2.19 Total and first-run originated hours of output among PSBs and key multichannel genres, all day, 2008 ...... 87 Figure 2.20 Spend on programmes ...... 88 Figure 2.21 Hours of first-run originated output on the five main PSB channels Spend on programmes ...... 89 Figure 2.22 Spend on first-run originated output on the five main networks ...... 90 Figure 2.23 Cost per hour of first-run originated content on the five main channels ...... 90 Figure 2.24 First-run originated output by the PSBs, all day and peak time ...... 91 Figure 2.25 Genre mix on five main PSB channels in peak time, by hours ...... 92 Figure 2.26 Genre mix on five main PSB channels in daytime ...... 93 Figure 2.27 The BBC’s digital channels genre mix, by hours (all-day) ...... 94 Figure 2.28 Total multichannel hours and first-run originations/acquisitions, 2008 ...... 95 Figure 2.29 Total multichannel hours by source across key genres, all-day, 2008 ...... 96 Figure 2.30 Content spend by commercial multichannels in key genres, 2008 ...... 96 Figure 2.31 Spend on first-run commissions by PSBs ...... 97 Figure 2.32 TV production sector revenue, by TV and non-TV activities ...... 98 Figure 2.33 Independent producers’ sources of UK television revenue ...... 99 Figure 2.34 Location of independents’ bases ...... 99 Figure 2.35 PSB independent commissions, by genre, 2008 ...... 100 Figure 2.36 PSBs’ external commissioning patterns, 2006 to 2008 ...... 101 Figure 2.37 Independent network productions, by day part, 2008 ...... 101 Figure 2.38 Broadcasters’ performance against original production quotas ...... 103 Figure 2.39 Performance against the out-of-London production quotas ...... 105 Figure 2.40 Expenditure on out-of-London production ...... 106 Figure 2.41 Volume of out-of-London production ...... 106

327 Figure 2.42 Original networked production expenditure, by broadcaster ...... 107 Figure 2.43 Breakdown of production volume, by broadcaster ...... 108 Figure 2.44 Qualifying hours commissioned from independent producers ...... 109 Figure 2.45 Qualifying independent commissions, by genre, 2008 ...... 110 Figure 2.46 Peak-time qualifying hours commissioned from independents ...... 110 Figure 2.47 Performance against national and international News quotas, all day ...... 111 Figure 2.48 Performance against national and international News quotas, peak time ... 111 Figure 2.49 Performance against Current Affairs quotas, all day ...... 112 Figure 2.50 Performance against Current Affairs quotas, peak time ...... 112 Figure 2.51 England ITV1 licensees’ non-network performance ...... 113 Figure 2.52 Nations Channel 3 licensees’ non-network performance ...... 114 Figure 2.53 The BBC’s performance against nations and regions quotas ...... 114 Figure 2.54 Proportion of repeats, 2006 to 2008 ...... 115 Figure 2.55 Performance against European programming requirements, 2008 ...... 116 Figure 2.56 Availability of television platforms ...... 120 Figure 2.57 Take-up of multichannel television on main sets ...... 121 Figure 2.58 DTT, satellite and cable net additions, year to Q1 2009...... 121 Figure 2.59 Platform share among all TV sets for Q1 2009 ...... 122 Figure 2.60 Platform shares by platform, TV sets 1 - 4 ...... 123 Figure 2.61 DTT on primary and secondary sets ...... 123 Figure 2.62 DTT quarterly and cumulative sales since launch of Freeview ...... 124 Figure 2.63 Average 2008 audiences, weekdays/weekends: by day part, all homes .... 125 Figure 2.64 Average 2008 weekday audiences, by day part and age, all homes ...... 126 Figure 2.65 Average 2008 weekend audiences, by day part and age, all homes ...... 126 Figure 2.66 Average weekly TV reach in all homes, by channel ...... 127 Figure 2.67 Average weekly TV reach in all homes, by age ...... 128 Figure 2.68 Channel shares in all homes, 1982 to 2008 ...... 129 Figure 2.69 Five main networks’ audience share, all homes ...... 130 Figure 2.70 Five main networks’ share, by platform ...... 131 Figure 2.71 Channel share by platform, 2008 ...... 132 Figure 2.72 PSB and portfolio channel shares in multichannel homes ...... 133 Figure 2.73 Broadcaster portfolio shares in multichannel homes ...... 134 Figure 2.74 BBC portfolio share in multichannel homes ...... 135 Figure 2.75 ITV portfolio share in multichannel homes ...... 135 Figure 2.76 Channel 4 portfolio share in multichannel homes...... 136 Figure 2.77 Five’s portfolio share in multichannel homes ...... 137 Figure 2.78 BSkyB portfolio share in multichannel homes ...... 138 Figure 2.79 UKTV portfolio share in multichannel homes ...... 139 Figure 2.80 Aggregate share of channel genres in multichannel homes ...... 140 Figure 2.81 Multichannel audience winners and losers, 2007 to 2008 ...... 140 Figure 2.82 The top channels by share in multichannel homes – 2007 to 2008 ...... 141 Figure 2.83 Platform demographics by age, social grade and viewing hours, 2008 ...... 142 Figure 2.84 Age and demographic profile of Entertainment channels in multichannel homes ...... 143 Figure 2.85 Consumer attitudes towards television programmes over 2008, by age ..... 144 Figure 2.86 Reasons why TV programme quality deteriorated in 2008 ...... 145 Figure 2.87 PIN/password-protected TV, 2008 ...... 145 Figure 3.1 Digital radio’s share of total radio audience, Q1 2009 ...... 150 Figure 3.2 Ownership of DAB set ...... 151 Figure 3.3 Listening to radio via the internet ...... 151 Figure 3.4 Listening to podcasts ...... 152 Figure 3.5 BBC and commercial radio share of listening and funding ...... 153 Figure 3.6 Change in listening hours 2007-2008, by sector ...... 154 Figure 3.7 Changes in listening hours, 2008 versus 2007, by age group ...... 154 Figure 3.8 UK commercial radio revenue and BBC radio spending ...... 160

328 Figure 3.9 Commercial net broadcasting: revenue share ...... 161 Figure 3.10 UK radio advertising spend and share of display advertising, 2002 - 2008 . 161 Figure 3.11 Commercial radio revenue per listener...... 162 Figure 3.12 Number of commercial analogue stations owned, by group ...... 163 Figure 3.13 Distribution of listening share among commercial radio licensees ...... 164 Figure 3.14 Share of all radio listening hours, Q1 2009 ...... 164 Figure 3.15 Commercial radio: weekly audience reach, Q1 2009 ...... 165 Figure 3.16 National commercial stations: reach and share, Q1 2009 ...... 166 Figure 3.17 Analogue commercial radio stations, with population served ...... 167 Figure 3.18 BBC radio audience share, 2003-2008 ...... 168 Figure 3.19 All BBC radio listening across the day (weekday) ...... 169 Figure 3.20 Weekly reach of BBC stations, Q1 2009 ...... 169 Figure 3.21 BBC network radio broadcast hours, by genre: 2008/09 ...... 170 Figure 3.22 BBC radio stations: cost per listener hour of programmes, 2008/09 ...... 170 Figure 3.23 UK radio stations broadcasting on analogue and DAB digital radio (excluding community radio), July 2009...... 171 Figure 3.24 Number of analogue radio station licences awarded ...... 172 Figure 3.25 Community radio income, by source ...... 173 Figure 3.26 Location of the UK’s community radio stations ...... 174 Figure 3.27 Community radio licence awards in 2008/09 ...... 175 Figure 3.28 Availability of DAB stations, by area ...... 178 Figure 3.29 Number of short-term RSLs...... 178 Figure 3.30 Reasons for running a short-term RSL: 2008 ...... 179 Figure 3.31 Reasons for running a long- term RSL: 2008 ...... 180 Figure 3.32 Reach of radio, by sector ...... 182 Figure 3.33 Share of listening hours, by sector ...... 182 Figure 3.34 Demographic profile of overall listening ...... 183 Figure 3.35 Changes in listening hours by age, 2003 - 2008 ...... 183 Figure 3.36 Profile of audience by age, for different station types ...... 184 Figure 3.37 Change in listening hours 2003-2008, by sector ...... 184 Figure 3.38 Most listened-to radio stations, Q1 2009 ...... 185 Figure 3.39 Most listened-to digital-only stations, Q1 2009 ...... 186 Figure 3.40 Breakfast-time reach of national stations ...... 187 Figure 3.41 Share of listening hours, by nation ...... 188 Figure 3.42 Take-up of equipment capable of receiving digital radio ...... 188 Figure 3.43 Listening to the radio via mobile phone ...... 189 Figure 3.44 Number of analogue and digital radio sets sold ...... 189 Figure 3.45 Value of analogue and digital radio set sales ...... 190 Figure 3.46 Average price of DAB digital radio receivers ...... 190 Figure 3.47 Intention to buy DAB digital radio ...... 191 Figure 3.48 Levels of radio listening since getting internet access ...... 191 Figure 3.49 Radio listening while online ...... 192 Figure 3.50 Listening to the radio while online, by age group ...... 192 Figure 3.51 Location of listening ...... 193 Figure 3.52 Satisfaction with choice of radio stations ...... 193 Figure 3.53 Satisfaction with radio content ...... 194 Figure 4.1 UK telecoms industry: key statistics ...... 197 Figure 4.2 Operator-reported UK telecoms industry retail revenue ...... 198 Figure 4.3 Mobile and data services as a proportion of total operator-reported retail revenue ...... 199 Figure 4.4 Fixed and mobile operator-reported UK telecoms industry retail revenue .. 199 Figure 4.5 Voice and data operator-reported UK telecoms industry retail revenue ...... 200 Figure 4.6 Estimated UK broadband service provision retail connection share ...... 201 Figure 4.7 Indicative LLU and wholesale DSL: average cost curve ...... 202 Figure 4.8 Selected ISP mergers ...... 202

329 Figure 4.9 Combined connection share of the five largest UK broadband providers ... 203 Figure 4.10 Selected UK super-fast broadband implementations and trials, July 2009 . 205 Figure 4.11 Mobile broadband sales, February 2008 to May 2009 ...... 207 Figure 4.12 Take-up of mobile broadband ...... 208 Figure 4.13 Growth of UK mobile internet users...... 209 Figure 4.14 UK smartphone sales ...... 210 Figure 4.15 Use of advanced services by iPhone and smartphone users ...... 210 Figure 4.16 Launch dates of mobile phone application stores ...... 212 Figure 4.17 Number of ‘apps’ available at Apple’s US App Store ...... 212 Figure 4.18 Application stores: public awareness ...... 213 Figure 4.19 Market share of post-pay and pre-pay subscriptions ...... 214 Figure 4.20 SIM-only contracts, as a proportion of all post-pay mobile contracts ...... 214 Figure 4.21 Inclusive any-network, anytime allowances in 30-day £15 SIM-only and standard contracts ...... 215 Figure 4.22 Monthly line rental for new mobile contract connections ...... 216 Figure 4.23 Length of new mobile contract connections ...... 217 Figure 4.24 Operator and MVNO/service provider market share of subscribers ...... 218 Figure 4.25 UK telecoms industry turnover ...... 222 Figure 4.26 UK telecoms industry retail revenue ...... 222 Figure 4.27 Growth in operator-reported retail telecoms revenues in 2008 ...... 223 Figure 4.28 Total telecoms connections ...... 223 Figure 4.29 Share of total UK fixed and mobile telecoms connections ...... 224 Figure 4.30 Share of total outbound voice call volumes ...... 224 Figure 4.31 Fixed voice telecoms revenue ...... 225 Figure 4.32 Average monthly voice revenue per fixed line ...... 226 Figure 4.33 Fixed telecoms call volumes...... 226 Figure 4.34 BT share of retail voice call volumes, by type ...... 227 Figure 4.35 Fixed telecoms connections ...... 227 Figure 4.36 Share of fixed lines taking non-BT voice services ...... 228 Figure 4.37 Proportion of unbundled exchanges and connected premises...... 229 Figure 4.38 Fully and partially unbundled lines ...... 229 Figure 4.39 Estimated mobile retail revenue, by service ...... 230 Figure 4.40 Estimated mobile retail revenue, by network operator ...... 231 Figure 4.41 Average monthly retail revenue per mobile subscription ...... 231 Figure 4.42 Mobile subscriptions, by network operator ...... 232 Figure 4.43 Pre-pay and contract mobile subscriptions...... 233 Figure 4.44 UK 3G subscriptions, by network operator ...... 233 Figure 4.45 Estimated UK internet and broadband retail revenue...... 234 Figure 4.46 UK residential and small business internet connections ...... 234 Figure 4.47 UK residential and small business broadband connections ...... 235 Figure 4.48 Estimated UK broadband service provision retail connection share ...... 236 Figure 4.49 UK business telecoms services revenue ...... 236 Figure 4.50 Average monthly voice revenue per business fixed line ...... 237 Figure 4.51 Breakdown of business mobile revenue ...... 237 Figure 4.52 Business voice call volumes ...... 238 Figure 4.53 Average weekly outbound voice call volumes per business fixed line ...... 238 Figure 4.54 Business fixed lines, by type ...... 239 Figure 4.55 Average household spend on telecom services ...... 242 Figure 4.56 Real cost of a basket of residential fixed voice services ...... 243 Figure 4.57 Real cost of a basket of mobile services ...... 244 Figure 4.58 Comparison of average fixed and mobile voice call charges ...... 245 Figure 4.59 Average mobile cost per voice minute, by customer type ...... 245 Figure 4.60 Lowest cost broadband options from major suppliers, July 2009 (£ per month) ...... 246 Figure 4.61 Household penetration of key telecoms technologies ...... 247

330 Figure 4.62 Household penetration of fixed and mobile telephony...... 248 Figure 4.63 Household telecoms connections, by socio-economic group ...... 248 Figure 4.64 Mobile-only households by age, Q1 2009 ...... 249 Figure 4.65 Household PC and internet penetration ...... 249 Figure 4.66 Reasons for not taking up the internet...... 250 Figure 4.67 Non-ownership of home broadband, by age group ...... 250 Figure 4.68 Location of internet access ...... 251 Figure 4.69 Awareness, stated access and use of VoIP ...... 252 Figure 4.70 Average monthly voice call volumes per residential fixed line ...... 252 Figure 4.71 Average monthly outbound voice minutes per mobile connection ...... 253 Figure 4.72 Average outbound mobile minutes, by customer type...... 254 Figure 4.73 Monthly text and picture messages per mobile connection ...... 255 Figure 4.74 Residential consumer satisfaction with fixed-line services ...... 256 Figure 4.75 Residential customer satisfaction with aspects of broadband service ...... 256 Figure 4.76 Customer satisfaction with aspects of mobile broadband service ...... 257 Figure 4.77 Residential consumer satisfaction with mobile services ...... 258 Figure 4.78 Proportion of consumers who have switched provider in the last 12 months ...... 259 Figure 5.1 Delivering content and voice services to consumers ...... 263 Figure 5.2 Simplified timeline of major online catch-up TV launches ...... 266 Figure 5.3 Proportion of adults with home internet who watch online catch-up TV ...... 267 Figure 5.4 Active reach of major online catch-up TV services in the UK ...... 268 Figure 5.5 UK audience profiles of PSB catch-up services, May 2009 ...... 269 Figure 5.6 Age profile of PC iPlayer users over time ...... 269 Figure 5.7 Monthly requests to view BBC iPlayer programmes, 2008 ...... 270 Figure 5.8 Cumulative requests to view programmes on 4OD, 2008 ...... 271 Figure 5.9 VoD use in Virgin Media homes ...... 271 Figure 5.10 Total online TV revenue ...... 273 Figure 5.11 Incidence of accessing unauthorised content...... 275 Figure 5.12 Unique audiences of leading file-sharing sites and networks ...... 275 Figure 5.13 Time spent on leading BitTorrent trackers ...... 276 Figure 5.14 Attitudes towards unauthorised content ...... 277 Figure 5.15 Top five reasons why people don’t access unauthorised content ...... 277 Figure 5.16 15-24s’ opinions on music content ...... 278 Figure 5.17 Value of retail music sales in the UK ...... 279 Figure 5.18 Physical and digital proportions of retail music sales in the UK ...... 279 Figure 5.19 Music sales by volume, 2006 - 2008 ...... 280 Figure 5.20 Online music revenues ...... 281 Figure 5.21 Unique audience of UK free-to-listen music streaming services ...... 282 Figure 5.22 Time spent using selected music services and media players ...... 283 Figure 5.23 Share of home film market, 2006-2007 ...... 285 Figure 5.24 Levels of interest in, or engagement with, user-generated content types ... 286 Figure 5.25 Experience of creative activities, by age ...... 286 Figure 5.26 UK visitors to user-generated content sites ...... 287 Figure 5.27 UK unique visitors to selected video-sharing sites ...... 287 Figure 5.28 Popularity of YouTube channels in the UK ...... 288 Figure 5.29 Most popular YouTube categories ...... 288 Figure 5.30 Proportion of adults who access social networking sites on the internet at home ...... 289 Figure 5.31 UK unique audiences of selected member communities ...... 289 Figure 5.32 Time spent online, per UK user, on selected member communities ...... 290 Figure 5.33 Unique audience and active reach of Twitter ...... 291 Figure 5.34 National and regional newspaper advertising revenue ...... 292 Figure 5.35 Changes in components of newspaper advertising revenue ...... 292 Figure 5.36 Circulation of national newspapers ...... 293

331 Figure 5.37 National newspaper websites: unique audiences ...... 294 Figure 5.38 Internet advertising expenditure, by category ...... 295 Figure 5.39 Share of advertising expenditure, by medium ...... 295 Figure 5.40 Unique audience of leading search engines...... 296 Figure 5.41 Availability of main distribution networks, 2008 and 2009 ...... 300 Figure 5.42 Location and distribution networks across the radio spectrum ...... 301 Figure 5.43 A-V devices take-up ...... 304 Figure 5.44 Take-up of DTV, mobiles and the internet, by age ...... 305 Figure 5.45 Take-up of digital technologies, by age, 2007 and 2009 ...... 306 Figure 5.46 Access to games devices in the home, by age ...... 307 Figure 5.47 Timeline of selected hybrid and on-demand audio-visual services ...... 308 Figure 5.48 Comparison of selected hybrid distribution platforms, June 2009 ...... 309 Figure 5.49 Use of mobile phone functions ...... 310 Figure 5.50 Use of wireless routers vs. take-up of broadband ...... 311 Figure 5.51 Interest in ebooks ...... 312

332