1 Executive summary

1.1 Introduction GMG is pleased with the emphasis that Ofcom has attributed to local TV as part of its DDR consultation. For GMG, local TV plays a central role in delivering the strategy of the Group on two key dimensions: • Realising the vision of creating a “digital bridge” between traditional media assets (e.g. print, radio) and new media assets (e.g. broadband video, online publishing, internet advertising) • Fulfilling the mission of GMG by using our resources to benefit the wider community and serve the public interest via long term investments in commercial media ventures and technology innovation

For these reasons, GMG’s principal objectives in this consultation response are to: • Highlight the commercial and social value that local TV could deliver, and describe the market leadership role that GMG could play • Illustrate our concerns for the risks of market failure implicit in the proposed approach to allocate the DDR spectrum • Propose potential remedies to mitigate such risks

1.2 The value of commercial local TV and the role of Guardian Media Group GMG has been the pioneer of local TV in the UK, having launched Channel M, a vibrant TV channel for Manchester, back in 2000. The past seven years of experience in the field have given GMG the confidence that the local TV media carries significant potential to deliver commercial and social value. Specifically, we see the following benefits emerging from commercially funded local TV businesses such as Channel M: • Providing a truly local editorial proposition with clear appeal for the mass audience o Channel M provides an exciting mix of local news, local sports coverage, local entertainment and lifestyle programming, delivered via low cost access and a FTA commercial model o In excess of 300,000 viewers per week watch Channel M regularly, out of a technically addressable audience of just over 1.1 million o Over 60% of viewers agree that Channel M is an important source of news and information about their community, and that it makes them feel part of their local environment • Offering a new and cost effective media for SME businesses to promote their products and services and compete against the large multinational brands o Local TV combines the cost effectiveness of print and radio with the rich media power of the TV advertising channel o SMEs can leverage local TV to strengthen their relative competitive position against the large multinational brands who are the traditional buyers of TV advertising campaigns at the national level • Optimising the use of public resources, since a commercially sustainable model would negate the need for the BBC to divert licence fee payers’ funds into the local TV sector

GMG believes that the local TV model could be replicated across the country to fulfil its important role, being the “digital bridge” between traditional media and new, broadband-based media. The unique governance structure of GMG makes us well placed to deliver on the key dimensions of social value and long term investment strategy. The benefits of Scott Trust ownership manifest themselves in a number of ways, but perhaps most strikingly in the stability it affords to the Group. Because the Trust does not take dividends or demand substantial year-on-year increases in profitability, as many other owners would, it enables GMG to take a much longer view on investment decisions. The result is that the Group is able to pursue a long-term vision rather than react to the short-term demands of shareholders. This in turn creates an environment that actively encourages innovation. No other company continued to invest in digital through the dotcom crash – Guardian Unlimited is the UK’s most popular newspaper website as a result. No other company would have invested in Channel M – applying the highest standards of news-gathering and journalism to a city TV station format.

1.3 The economic sustainability of local TV In spite of the highly encouraging response from the market (e.g. audience, communities, advertisers), the economic sustainability of a pure commercially-funded local TV model like Channel M is fragile. The absence of a standardised audience measurement system such as BARB implies that the local TV media “trades at a discount” compared to its real potential. The value of a 30-second advertising slot is more aligned with that of an equivalent radio slot, rather than with the proportionate value of a national TV slot. Besides this inherent weakness, GMG’s business planning and forecast analysis for Channel M indicate that two additional conditions can dictate the commercial viability of its local TV business: 1. The ability to address 100% of the entire population available in a given conurbation 2. The avoidance of turbulence arising from public funded local TV models, such as BBC Local In particular, we see the following risks in local TV: • The first condition, 100% audience reach, relies on the accessibility of a local TV channel from the most popular TV distribution platforms, e.g. Digital Terrestrial Broadcasting and Digital Satellite o while other platforms such as cable and IPTV will develop further under the push of Virgin Media and BT, the analysts predict a continued marginal role for these technologies over the next 5 years o under this scenario, our simulations indicate that if the analogue spectrum currently assigned to Channel M is not replaced by digital spectrum after the DSO, the business plan would become very marginal in NPV terms • The second condition, avoidance of turbulence from BBC Local, is the direct consequence of the inevitable audience fragmentation that would arise for the local TV media o audience fragmentation would otherwise lead to reduced “yield” for the local media buyers and to lower advertising revenues – in the face of a largely fixed cost base o GMG's business plan assumes local TV market leadership, and it would become NPV-negative if BBC Local were to compete If the above conditions are guaranteed, GMG’s business plan simulations would provide high confidence on the commercial sustainability of the local TV model. The Channel M “template” could be replicated in other parts of the country, by GMG or other organisations. If interleaved spectrum were made available for local TV consistently across the UK, either directly awarded to broadcasters or as a “must offer” obligation, the opportunity would emerge to create a national federated network. This would enable economies of scale and scope in parts of the supply chain, and create revenue synergies by offering a new one-stop-shop for media buyers.

1.4 Implications for the DDR framework We note that even in the most optimistic scenario, local TV, be it at city level or as a national federated network, while delivering substantial citizen value, in commercial terms is relatively small compared to alternative sectors such as mobile and national broadcasting. Therefore, a market-led approach to the award of spectrum would, with all probability, lead to a market failure for local TV. In the optimal scenario to pre-empt market failure, Ofcom would allocate a portion of the DDR spectrum to the exclusive use of local TV services, thus avoiding uneven competition with players from high margin sectors such as the mobile operators. In a context where Ofcom decided to opt for an entirely free market approach, GMG recommends adopting a number of risk mitigating principles towards the interleaved spectrum: • Recognise the high citizen value provided by local TV, by creating a framework that enables local TV broadcasters to become “users” of interleaved spectrum, as a second best alternative to being “owners” • Define a packaging of spectrum to reflect the existence of addressable local audiences rather than the current location of individual transmitters • Create a spectrum award process that avoids “defensive purchases” of sub-optimal spectrum by cash rich bidders (e.g. impose the obligation to bid for no more than one spectrum band for a given application) • Award the interleaved spectrum early enough to allow an effective handling of the transition from analogue to digital for the channels that are already in operation (e.g. Channel M would lose its analogue spectrum during 2009) • Provide explicit reassurance that the BBC would not be allowed to roll out local TV as this would severely impair any commercial case for local TV • Avoid disadvantaging the weaker commercial players by providing detailed technical information such as geographic coverage levels and household reach achievable using interleaved spectrum

1.5 Conclusion In summary, we would like to express how positive we are about the local TV opportunity. We are proud to be pioneers of local TV, and pleased with the success of Channel M in demonstrating the social value that local TV brings to a community, and in showing how local TV‘s potential as a commercially run business. In short, local TV is important to GMG for a number of reasons: it is in keeping with our community-focussed mission and values, it has the potential to be an attractive new business, and it is of strategic importance to us as part of our transition from traditional media to new media, in the light of pressures in the regional press market. However, there are external factors beyond our control which have serious ramifications on the viability of the local TV business: the availability of appropriate interleaved spectrum to broadcast local TV, and the shadow of BBC Local. The choice of a specific DDR framework, and decisions over the role of the BBC in the local TV market, would have a significant impact in deciding the future of local TV.