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] 1 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).