The Communications Market 2005

1 Overview

Contents
1.1 Introduction.............................................................................. 7
1.2 Key communications themes................................................... 8
1.2.1
1.2.2
1.2.3
1.2.4
1.2.5
1.2.6
1.2.7

Digital communication grows as consumers convert from analogue.............8

Improved availability - rural communities getting connected .........................8
Proliferation of services broadcasters develop digital portfolios...............10
New and enhanced services - consumers take control ...............................11
Falling prices more for less.......................................................................14
Take-up broadband Britain arrives ...........................................................15
International regulatory developments ........................................................17

1.3 The communications consumer............................................. 19

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

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

1.5 Spectrum ............................................................................... 27

1.5.1
1.5.2
1.5.3
1.5.4
1.5.5
1.5.6
1.5.7
1.5.8
1.4.9

What is spectrum?.......................................................................................27
The importance of spectrum........................................................................27
Spectrum shortages ....................................................................................27
Why is it regulated? .....................................................................................29
New approaches to spectrum management................................................29
Current and future balance of spectrum use ...............................................30
Spectrum trading and liberalisation .............................................................30
Newly available spectrum............................................................................32
International comparison .............................................................................32

1.1 Introduction
This is the second in a series of annual Communications Market reports by Ofcom
(the Office of Communications). The report highlights developments across the
electronic communications sector in the UK, covering television, radio and
telecommunications, for the calendar year 2004 and the start of 2005.
It is supplemented by quarterly updates, in October, January and August each year,
which provide the latest available data on each sector, including:

industry size, structure and financing

availability, penetration and use of products

consumer attitudes and behaviour

The Communications Market supports Ofcoms objective to provide best in class

research to which stakeholders have regular access. It also provides the market
context for Ofcoms reviews of Radio, Public Service Broadcasting and Telecoms.
This report fulfils Ofcoms requirement to produce an annual factual and statistical
report under Section 358 of The Communications Act 2003.
The information set out in this report does not represent any proposal or conclusion
by Ofcom in respect of the current or future definition of markets and/or the
assessment of significant market power for the purposes of the Communications Act
2003, the Competition Act 1998 or other relevant legislation.
Annual Communications Market reports are now published in hard copy and on the
Ofcom website. Quarterly updates are available on the website only.
Ofcom welcomes comments on the content and style of The Communications Market
to help inform future publication. Comments and queries should be sent via e-mail to
market.intelligence@ofcom.org.uk.

1.2 Key communications themes

1.2.1 Digital communication grows as consumers convert from analogue
2004 was a year of growth across the digital communications sector, and one of slow
decline for analogue services. Net household additions for broadband, mobile (2.5G
and 3G), digital radio and digital television were all greater than in 2003, driving
increased spend and usage.
Both conversion from analogue in broadcasting and product upgrades in telecoms
have proceeded at pace, driven by:

improved availability

proliferation of services

new and enhanced consumer offerings

falling prices

In this section we analyse each of these drivers before looking at latest take-up
figures.

1.2.2 Improved availability - rural communities getting connected

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

DTT

DAB
coverage by
at least one
multiplex

Broadband

DTT
composite
coverage by
all 6
multiplexes

DSL
Cable modem
Fixed Wireless
Access

Source: Ovum
Note: Digital television and Broadband access via satellite is available across most of the UK

Satellite remains the most widely available method of receiving digital television
services, with coverage of almost all UK households apart from a few built-up and
hillly areas, where line of site to the satellite is unavailable. Both BSkyBs satellite
footprint and the reach of Digital Terrestrial Television (DTT) transmitters remained
8

more or less constant in 2004. DTT availability will remain close to 75% population
coverage until the phased switchover to DTT (and shutdown of analogue
transmission) allows for a power boost to the digital signal. It is envisaged that the
first phase of the digital switchover will take place in 2008, with the whole country
converted by 2012.
For digital radio too, coverage is more extensive now than last year, with both Digital
One, operator of the national commercial DAB multiplex, and the BBC building new
transmitters and new local multiplexes launching since last summer in Cambridge
and Plymouth / Cornwall. Digital One is now available to over 86% of the population
of Great Britain (it is not licensed to cover Northern Ireland) while the BBCs DAB
services can be received by 85%. Local digital services are now licensed to cover
89% of the population, although coverage within these licensed areas is not
complete. As both internet and digital television penetration grows, digital radio
should become even more widely available, with the possibility of DAB chipsets in
mobile phones also due to become a reality within the next year via the BT / Digital
One Livetime service.
The majority of new broadband connections are supplied via asymmetric digital
subscriber line (ADSL) technology, predominantly over BTs copper wireline network.
Like 3G, ADSL broadband availability is lowest in rural areas, so perhaps the most
significant milestone for extending digital service accessibility in 2004 came in August
when BT announced the scrapping of exchange distance limits, permitting
consumers in more remote areas to receive a service. Until this point, customers
living more than 6km from a broadband enabled exchange were unable to receive a
service.
More recently, BT announced further exchange upgrades which, combined with the
removal of distance limits, will make basic ADSL broadband even more widely
available, reaching 99.6% of households by the end of summer 2005 (up from 96% in
May 2005 and 90% a year earlier). Other solutions, including wireless, may still need
to be deployed to make broadband available to the remaining half million or so UK
citizens without access.
Broadband internet connectivity, along with telephony and broadcast services, is also
available through the cable operators fibre-to-the-kerb networks. The overall level of
cable network build-out has remained broadly similar over the past year, with 50.4%
households passed in March 2005. However, both Telewest and ntl have invested in
network upgrades, with an estimated 94.1% of their combined franchise areas now
offering digital services. Telewest has announced plans to follow BSkyBs example
and migrate the whole of its customer base to digital by the end of 2006.
Cable operators are joining broadband suppliers in seeking to unbundle local loops in
order both to in-fill franchise areas and to extend their services to new locations. This
is a cheaper way for them to reach new customers than investing further in cable
infrastructure. There were 28,000 unbundled lines in the UK at the end of 2004 this
represents only half of one per cent of all broadband-enabled lines. The UK remains
some way behind France and Italy, both of whom had unbundled over 12% of
broadband-enabled lines by the end of 2004. Use of unbundled local loops has also
increased the availability of the Homechoice TV over DSL service, which expects to
have extended its availability to 2.4m homes in June this year, and has already
moved beyond its original west London footprint.
All four of the main UK mobile operators have now joined 3UK in the 3G consumer
market, typically offering download speeds of 384kbit/s. Although the footprint varies
9

by company, an estimated 82% of UK households were able to receive 3G signals

from at least one operator at the end of 2004 (up from 75% in 2003), as transmitter
networks were extended to cover less densely populated areas (Figure 1.2). Each
operator has committed to rolling out services further, to reach 80% by the end of
2008.
Figure 1.2: Availability of digital services as at April 2005
UK-wide
2005

Increase on England
2004

Wales

Scotland

N Ireland

100%
99%
n/a
92%
n/a
n/a
57%
0%
73%**

100%
99%
n/a
92%
n/a
n/a
82%
0%
92%**

100%
99%
n/a
97%
n/a
n/a
58%
0%
100%**

percentage
points

Fixed line calls

Mobile
3G*
Broadband*
Cable
Satellite TV
Terrestrial TV***
TV over DSL
DAB Digital
Radio*

100%
99%
82%
96%
47%
97%
75%
5%
89%

0%
0%
+5%
+6%
+0.5%
0%
0%
0%
+4%

100%
99%
n/a
97%
n/a
n/a
73%
6%
89%**

* services available from at least one operator

** Figures relate to local multiplex licensed population coverage rather than transmitter coverage
*** Figures relate to availability of signals from all six multiplexes
Data relates to households except radio which shows individuals.
Figures for broadband are for households connected to enabled exchanges slightly less than this
number are able to access the services.
Source: Operators / Ofcom

1.2.3 Proliferation of services broadcasters develop digital portfolios

Consumers now have unparalleled choice over the TV and radio they consume.
Twenty years ago, television viewers had just four channels; but improvements in
compression technologies mean all digital platforms now have increased capacity,
and operators are taking advantage of lower costs to launch new services.
More than 370 channels were broadcasting in the UK at the end of May 2005 (with
many timeshifted +1 services in addition), yet applications to launch more channels
show no signs of abating. Ofcom issued 156 new licences in 2004 alone, more than
in any previous year, with the entertainment, shopping, sport and adult genres
accounting for over three quarters of the total.
The majority of new licences were for services broadcasting on satellite and cable.
Satellite remains the platform with the greatest potential capacity, offering 352
television channels (excluding timeshifted channels, regional versions of BBC ONE,
BBC TWO and ITV1, interactive services and pay per view channels), available
either for free or via subscription (up from 272 last year) and over 60 pay per view
services. By contrast, digital cable provides between 100 and 136 channels
(depending upon the operator), while DTT has 32 free channels, with a further 11 pay
services.
Some of this service proliferation has emanated from the UKs major broadcasters.
Each is developing a portfolio of channels in an attempt to head off the threat of
audience fragmentation posed by increasing multichannel take-up:

10

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

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

services including More4 and its broadband documentary channel, as well as
moving into radio with the acquisition of a 51% stake in digital station Oneword

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

broadband on-demand access for its programming

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

The same is true in radio:

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

This move towards station portfolios will be increased by consolidation in the sector.
In May 2005, the merger of Capital and GWR came into effect, to form GCap Media.
The new group is the biggest player in radio (in terms of revenues, number of
stations and listening hours) by some margin. It owns a large portfolio of local and
national brands.
In radio, the number of services is also increasing, with digital stations becoming a
core portfolio component of the major operators. In total 372 licensed radio stations
in the UK broadcast on analogue and on DAB digital radio, with more on satellite,
digital terrestrial television and cable television. Of the 326 on analogue (the majority
on FM frequencies), 275 are commercial services, broadcasting to a local, regional or
UK-wide audience. These will soon be joined by a new tier of community radio
stations which are now being licensed.
DAB offers 215 stations, of which 172 are commercial, broadcasting either to
individual local areas, to several local areas or across the UK. These are
supplemented by 11 BBC UK-wide services (including the World Service) and 32
BBC local or nations radio services. In addition to these, 88 digital radio services are
available via satellite, up from 84 last year, while DTT offers 21 and on cable, ntl for
example, delivers 40 stations. A large and rapidly changing number of services are
available to UK listeners over the internet.

1.2.4 New and enhanced services consumers take control

The transition from analogue to digital technologies is continuing to drive the
convergence of broadcast, telecommunications and internet services. Improvements
in digital compression, transmission and storage technologies are increasing network
capacities and capabilities, allowing operators to offer not just more but also new
types of service to consumers.
Digital radio is proving to be one of the more innovative sectors in this respect.
Listeners can access radio through many devices, from TV to mobile phones and the
internet, as well as via more traditional sets. But they are also exercising greater
control over their listening patterns, using non-linear programme delivery from ondemand and time shift services. In turn, some of these products promise new

11

revenue streams for operators, helping to offset the problems posed by channel
proliferation.
The BBC pioneered on-demand radio services and claims that 4.4 million hours of
listen again programming was accessed in February from its website. However,
commercial radio has also entered the arena, with products such as GMGs
jazzfm.com. And several manufacturers offer DAB receivers (Digital Radio
Recorders) with pause, rewind and record functionality, which also help to deliver
greater control to audiences.
In addition, commercial groups now offer a host of enhanced interactive services with
which to entice the listener (and develop brand loyalty). These include Emaps
Channel Hopper, offering programme-related downloads and information for listeners
on Freeview, and GWRs Hear it, buy it burn it service. The Digital One / BT
Livetime service promises multimedia content (including video) delivered using DAB
data capacity, when it launches later this year.
Another example of the flexibility and control offered by new radio services is
podcasting, though which broadcasters publish digital recordings of radio
programmes on the internet, which can then be downloaded onto PCs and
transferred to portable digital music players (such as the iPod). This means listeners
can access radio where and when they want. Virgin Radio has been offering
podcasts of its breakfast show since March 2005 and the BBC is trialling the concept
by making a small number of programmes available as Podcasts via its website.
Commercial radio stations are also experimenting with the technology, seeking to
extend brand reach and increase advertising impacts. The success of the concept
may well be determined by the ability to negotiate distribution rights for the medium.
Although products such as the Reciva internet radio (which utilises WiFi and
broadband connections) are coming onto the market, they are not common. DAB is
therefore the only widely available digital platform currently offered in the UK that
allows portable radio reception (although Digital Radio Mondiale services may launch
later in 2005). However, with growing competition for listeners time from 3G services
and podcasting, competition for portable reception time is likely to increase.
Like radio, both free-to-view and pay television broadcasters are looking to
alternative revenue streams to bolster income from traditional advertising,
sponsorship and subscription sources. The five main channels have all launched a
range of interactive and retail services to complement their broadcast offerings, and
BSkyB and the cable operators are increasingly turning to sophisticated added-value
products personal video recorders (PVRs), high definition TV (HDTV), video-ondemand and PPV, interactive services to sustain their growth.
Sky+ continues to be the UKs market leading PVR, with penetration more than
doubling from 322,000 households in March 2004 to 770,000 (10% of its subscriber
base) by the first quarter of 2005. With the hard drive cost/capacity ratio continuing to
fall, the latest version of Sky+ has a 160GB hard drive that can store around 80 hours
of video. Some Freeview boxes now also offer integrated PVRs, including some with
twin tuners (record one programme while watching another), series link capability
(automatically record all episodes after watching one) and large hard drives.
While PVRs offer the convenience of time shifting linear programme schedules,
many require the user to decide what they want to view before it is broadcast and
configure the device to record accordingly (although intelligent devices like TiVo,
which learn what the viewer likes and record it for them are available). True on12

demand services have content pre-stored on servers which users can access
whenever they wish, using a high speed, high reliability digital network. These
services could receive renewed impetus in 2004 with the re-launch of Homechoice
TV over DSL (with competitors expected to follow), but copyright issues must be
overcome if network PVRs are to develop.
Latest developments have seen the worlds of online search and television
converging, as PVR operators and content providers enter talks with companies like
Google and Yahoo!. They plan to develop searchable content libraries which would
allow viewers to download films and programmes from a vast online archive, and to
watch them on their TV sets.
At the same time the cable operators have pressed ahead with plans for on-demand
television, with both ntl and Telewest currently running trials. And, like BSkyB, both
cable companies have announced plans to meet the demand for better picture quality
from an increasing number of consumers who have purchased large, flat panel TV
displays, by offering a High Definition TV (HDTV) service in 2005/06. The initial focus
for the new format is likely to be sports, movies and documentaries and its
introduction will help meet the challenge of film distribution via new high definition
DVD formats which are expected to emerge over the next couple of years.
3G networks also offer the additional capacity needed to deliver bandwidth-hungry
multimedia services. While 3G allows users to download short video clips and music
tracks to their handsets on demand, operators are still trying to encourage use of
more basic multimedia applications, such as picture messaging (essentially a 2G
product). However, 2004 saw increasing interest in delivering digital broadcast
content to handheld devices; a mobile television trial being conducted by ntl and
Nokia in Oxford uses DVB-H (DVB to the handheld) technology to broadcast TV,
radio and data services.
The growth in faster, always-on broadband internet connections is supporting growth
in a whole range of new of media and communications services, including Voice over
IP (VoIP) and music and video downloading. The BBC recently conducted a
successful trial of a video download service which gave viewers access to archive
material via their broadband connection, although no mainstream UK channel has yet
made all of its content available via the internet. The introduction of standard
broadband speeds of 1Mbit/s or more (and perhaps partly a result of increasing
levels of legal action against individuals accused of copyright infringement in the UK)
have led to burgeoning use of legitimate music download sites. According to BPI
figures, 5.6 million tracks were downloaded in 2004, with 4.6 million more in the first
quarter of 2005.
However, the new services offered by digital technologies are presenting new
challenges to content providers in terms of their ability to prevent near perfect,
unauthorised digital copies from being freely distributed over the internet and via
portable storage devices. This had lead to an increased focus over the last twelve
months on digital rights management technologies (DRM) capable of ensuring that
only those who are authorised to access the content are able to do so, while retaining
the flexibility for them to transfer it between devices. The increasing amount of digital
content available is also making electronic programme guides and digital search
engines an essential feature of many new content services.

13

1.2.5 Falling prices more for less

Improving technologies and increasing competition are delivering the dual consumer
benefits of extended choice and lower prices. The biggest improvements have been
in broadband, where increased unbundling of BTs copper local loop, improved
technologies such as ADSL2+ and continued infrastructure investment by the cable
operators have resulted in ever faster broadband speeds being offered for the same
or cheaper prices. At the top end of the market, UK Online offers an 8Mbit/s service
for 29.99/month in some areas, while BTs entry level product in May 2005 offered
1Mbit/s for just 17.99 per month, down from 24.99 for 512kbit/s 12 months earlier
(Figure 1.3).
Figure 1.3: Average UK residential broadband subscription prices
/month
60
50

50

50

35

35

41

40

35

35

30

20

27

26

26

25

32
20

23

512kbit/s
1Mbit/s
>1Mbit/s

17

0
Q4 2002

Q2 2003

Q4 2003

Q2 2004

Q4 2004

Q1 2005

Source: ECTA/OECD

A wide range of pay TV packages is available to consumers, ranging from 7.99 per
month for Top Up TVs 10 channel digital terrestrial service, to 51 per month for
Skys most comprehensive offering with Sky+. In addition, the cable and TV over
DSL providers offer a host of bundled triple play packages with telephony, internet
and broadcast services. In general, pay TV prices increased in 2004 the top Sky
tier rose 7.9% for example. However, all platforms offered consumers more for their
money last year with extra channels, faster connections and cheaper phone calls.
Consumers also have a greater number of free services available to them. In addition
to the increase in DAB and satellite radio services over the last year, viewers can
receive a large number of free channels, including all those provided by the BBC,
ITV1, Channel 4 and Five on digital satellite. BSkyB offers a Freesat product
whereby viewers can purchase set-top boxes with a free-to-view card through which
to watch these services, although it has yet to launch a significant marketing push to
promote the concept.
Hardware, too, is rapidly becoming cheaper. The arrival of new low-cost
manufacturers, many from the Far East, is driving down retail prices for everything
from DTT receivers to DAB sets. Future reductions in handset prices and
improvements in service coverage should enable 3G to fulfill its potential and surpass
GSM as the dominant mobile technology.
Although still in its infancy, Voice over IP (VoIP) is another technology which looks
set to bring down prices. It allows voice calls to be made over data networks using
internet protocol (IP), a far more efficient way of transporting calls than traditional
circuit-switching. In order to benefit from the price savings of an all-IP voice call (i.e.
one that totally bypasses the PSTN), both the caller and the recipient need to be
14

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

1.2.6 Take-up broadband Britain arrives

Take-up of most new technologies conforms broadly to an S-shaped curve, although
there is some variance in the slope of the S, and different groups within the
population tend to adopt new technologies at different rates (Figure 1.4).
2004 was the year in which broadband finally moved in to the early majority stage of
this curve, effectively becoming a mass market consumer proposition. Following
growth of over 90% during the year, the number of residential broadband
connections in the UK stood at 6.2 million at the end of December around a quarter
of all households meaning broadband accounts now outstrip narrowband. It also
means that the UK now occupies a mid-table position in the table of broadband
connections per 100 population, having lagged significantly behind the US, Japan
and most other western European countries over the past few years.
Figure 1.4: Current position of major technologies on the technology adoption
curve
Take-up %
100%

85%

GSM mobile
(H/holds)
Digital TV

50%
Personal digital
music players

Broadband

WiFi hotspots
WiFi homes

15%

3G mobile
PVR& VOD
Innovators

DAB Radio
Early
Adopters

Early
Majority

Late
Majority

Late
Adopters

Time
Source: Ofcom

There were 61.2 million active mobile phone customers reported in the UK at the end
of December 2005 (either pre-paid or on monthly contracts), more than one for every
individual in the UK. However, as some people have more than one mobile
connection, household penetration stands at 85%. This sets operators seeking to
extend consumer take-up the difficult task of trying to convince late adopters, or
laggards, who are traditionally resistant to change, and who accept ideas only if they
have become mainstream (or even tradition). Operators may instead choose to
focus on the business sector.

15

Despite the mobile networks considerable financial investments in licence fees and
new infrastructure over the past few years, 3G broadband mobile services have yet
to make a significant impact in the UK mobile market. At the end of 2004 there was a
total of 2.5 million active 3G customers (all with 3UK other operators had not yet
launched their consumer services) up from less than 250,000 a year earlier. 3G takeup was delayed by the later-than-expected product offerings from the major
operators, and also by the poor choice, quality and availability of handsets. However,
with recently intensified operator competition, improved devices and the launch of
new services, consumer demand is expected to rise in 2005 the technology could
yet prove to be adopted by the majority.
2004 also saw an increase in uptake of VoIP products, although this was principally
among large businesses, rather than consumers. For larger businesses with multiple
office locations, the main attraction of VoIP is immediately apparent free voice calls
within an IP platform (e.g. between offices or to other companies with VoIP
capability). All large businesses have high-bandwidth permanent IP connections,
enabling seamless VoIP connectivity with high quality of service. Recent large
corporate VoIP conversions have included Marks & Spencer and Abbey National.
Freeview continued to reshape the UKs TV landscape in 2004. Conversion from
analogue to digital TV maintained momentum and at the end of 2004 59.4% of UK
homes had digital, up from 50.2% in 2003 (Latest Q1 2005 numbers show that this
has risen to 61.9%). Freeview accounted for nearly 70% of this growth, with more
than 3.25 million Freeview boxes and integrated digital TVs sold over the course of
2004. As a result, the cumulative total for digital terrestrial households by the end of
the first quarter of 2005 was over 5 million households. Although Freeview operates
primarily as a free-to-view platform, its increasingly extensive and attractive line-up
must represent some competition for at least the basic packages of both cable and
satellite. With Ofcom recommending that the phased process of digital switchover
begins in 2008, digital TV needs to move swiftly into its late adopter stage.
Pay television also prospered last year, with BSkyB achieving 369,000 net subscriber
additions over the year (although growth rates were down), bringing its total
subscriber base in the UK to almost 7.3 million homes. The total cable subscriber
base remained more or less static at 3.3 million, although digital customers increased
by 200,000 principally converters from their analogue services.
With the offer of a wider range of stations, improved data services and an improved
and cheaper range of sets, increasing numbers of customers are migrating from
analogue to digital radio. Sales of DAB sets received a major boost in 2004 with total
cumulative sales during the year almost trebling to 1.4 million, raising household
penetration of DAB sets to 5%.
The time-poor, cash-rich consumer is a market sector that is becoming increasingly
targeted by digital operators. These people demand more convenient ways to gain
access to the services and content they wish to use and more control over when and
where they use them. Increasing number of operators have stated an intention to
offer VoD services, PVR capable set top boxes and personal digital media players.
With increased competition, the decreasing cost of digital storage devices and wide
spread adoption of broadband, take-up of these services looks set to accelerate.
Whilst the coming year will see the introduction of new and improved digital products
and services we are also likely to witness growth in innovative, low cost alternatives
to existing services. VoIP will present challenges for existing telephony operators and
the spread of WiFi hotspots will provide an alternative to 3G networks for accessing
16

the internet outside the home and the office. HDTV will offer new competition to
existing digital television services and could provide particular challenges for digital
terrestrial television, the most capacity constrained of the platforms. These
innovations promise to enhance consumer choice and value in the year ahead.
Figure 1.5: Availability and penetration of digital services Q1 2005
100

99.0

97.0

96.0

89.0

82.0

UK households,

80

60

75.0
51.8

89.0

Availability
Penetration

40

31.3

20

20.0
23.1

5.0

12.0

10.2
ov
er
D
SL

0.1

TV

TV
C
ab
le

te
rre
st
ria
lT
V

M
ob
ile

D
ig
ita
l

3G

di
gi
ta
lr
ad
io

D
AB

Br
oa
db
an
d

TV
Sa
te
llit
e

M
ob
ile

(2

/2
.5
G
)

5.0

Source: Ofcom / operators / licensees

Note: figures for radio are for individuals not households

1.2.7 International regulatory developments

Over the past 18 months, the international regulatory agenda has been dominated by
issues surrounding digital switchover, new digital services and spectrum
management. VoIP has also started to exercise regulators minds, and some have
started to concentrate on mobile termination rates both issues have multinational
significance.
As international boundaries around communications continue to become more
blurred particularly with the increased impact of the internet and, to a lesser extent,
issues surrounding satellite broadcasting it will become ever more important for
regulators from different countries to co-ordinate policy in order to ensure as far as
possible a seamless global market.
Figure 1.6 lists the most important international regulatory developments of the past
year.

17

Figure 1.6: International regulatory developments

Issue

Country

Body

Regulatory action

US

FCC

Crackdown on broadcasting standards

Italy

Italian
Parliament
Digital TV
Kommissionen

Confirmed intention to implement digital switchover

by December 2006.
Plans submitted to Swedish government indicating
switchover should start next year and be completed
by February 2008.
Passed legislation to pave the way for digital
switchover by 2010.

Television
Broadcasting
standards
Digital
switchover

Sweden
Spain

The Spanish
Parliament

Netherlands

House of
representatives

Italy

AGCOM

Germany

MABB

Radio
Digital
broadcasting

France

Plans submitted for introduction of DAB commercial

digital radio with calls for analogue to be switched off
no later than 2019.
New legislation published paving the way for more
DAB stations and greater coverage.
Stopped issuing DAB licences on the grounds that
outdated technology has been superseded.
Consulting on digital radio.

Telecoms
VoIP

Canada

CRTC

US
Ireland

FCC
Comreg

Netherlands
Norway
Spain

NPTA
CMT

Japan

MIC

Privatisation

France

Mobile
termination

Australia

French
government
ACCC

Enforced 911 emergency service provision by fixed

VoIP service providers.
Prohibited blocking of VoIP applications.
Issues draft Direction to allow access to a new
number range for VoIP phone services.
A consultation on the planned policy for the use of
numbers for VoIP services.
Issued an outline on the regulation of VoIP.
Finalised consultation on VoIP regulation and
proposed VoIP numbering and portability guidelines.
Invited comments on draft report concerning
Measures for Preserving Important Communications
such as emergency services.
Initiated sale of 9.6% stake in France Telecom.
Government retains stake of 41-43.5%.
Recommended mobile operators cut termination
rates by over 40% by 2007.

Spectrum
Spectrum
management

18

US
Ireland

US Secretary of
Commerce
Comreg

Sweden

PTS

Launched review of current spectrum management

policies.
Calls for opinion proposed approach to spectrum
management for next 2005-2007.
Call for comments on the present and future
spectrum allocation table.

1.3 The communications consumer

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

1.3.2 Consumption new services over new platforms

Consumers are increasingly changing the way in which they access communications
services, and broadening the range of services they use. Digital TV viewers can now
use devices like the red button to access enhanced or interactive content; 2.5G and
3G mobile users can send pictures and video respectively over their mobile phones;
broadband internet users can now download their entire music libraries from the
internet, then download music to portable audio devices, thus bypassing the need to
buy and store CDs this trend will inevitably extend to video material as broadband
speeds increase and compression technology evolves.
Interactive and digital radio services are proving increasingly important to both
consumers and broadcasters. In addition to the 4.4m hours of listening to the BBCs
on-demand radio services in February, listening to digital only 1 stations accounted
for 8.3% of all commercial radio audiences by the end of 2004.
Listening via non-traditional means is also rising. Radio via digital television
continues to grow strongly, with RAJAR figures showing that nearly a third of all
adults had at some time listened to radio using their television set by the end of 2004.
However, although reach is higher through television, share is higher on DAB,
possibly reflecting the impact of additional choice or perhaps the fact that keen
listeners have tended to be early adopters of the technology.
The number of adults who claimed ever to have listened to radio via the internet has
risen to 16.3%, up from 15.1% in 2003. In addition to increased choice, through
access to thousands of foreign stations (as well as the majority of the UK services),
listening via the internet may demonstrate radios value as a secondary medium. For
example radio can serve as a background whilst browsing the internet, something
screen-based services struggle to offer. Listening via mobile phones is also
increasing, although so far this has been via an analogue radio tuner included in the
handset.
Increasing channel budgets for the main television channels over the past six years
have not halted the increasing fragmentation of the TV audience. This trend has
been apparent for several years as digital take-up grows. Between 1994 and 2004,
ITV1s share declined from 39.5% to 22.8%, and BBC ONEs from 32.4% to 24.7%.
Meanwhile, the combined share of the digital channels has steadily increased from
6.6% in 1994 to 26.2% in 2004 in other words they now account for more viewing
1

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

19

share than either BBC ONE or ITV1. However, this overall trend conceals significant
differences between cable, satellite and Freeview homes: the main five channels
combined account for just over half of viewing in cable and satellite homes,
compared to over 80% of viewing in Freeview homes.
The main five channels still reach a wide cross-section of the audience: on average,
all of them except Five were watched for at least fifteen minutes each week by more
than half of all viewers. Nonetheless, some of the more traditional public service
genres find it harder to secure a place in increasingly competitive schedules.
In mobile telecoms, the four major networks continue to dominate, with new entrant
3UK only recently starting to make inroads. More interesting is the continued rise of
MVNOs (mobile virtual network operators), who piggy-back on one or other of the
UK networks to offer competing mobile services. Virgin Mobile, which operates over
the T-Mobile network, is the most successful MVNO, with over 4 million active
subscribers by March 2005. Tesco Mobile, which launched at the end of 2003 over
the O2 network, had over 500,000 subscribers by December 2004.
Figure 1.7: Take-up of other household communications devices
% of Households
100%
82%

87%

87%

85%

80%
60%

54%

40% 29%

39%

46%
27%

68%

Video recorder

65%

DVD player
PC

45%
18%

17%

20%

85%

MP3 player

8%

5%

3%

6%

0% 2%
2000

2%

2%

2001

2002

2003

PVR

10%

2004

Source: Ofcom - The Publics View 2003

Note: PC penetration was 64% as at February 2004

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

1.3.3 Consumption digital households spend more money

The adoption of a range of new technologies and digital services across television
and telephony (excluding some elements of installation, equipment and

20

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

expenditure.
Figure 1.8: Average weekly household communications spend
bn
3.5%

3.4%
0.48
3.64

10

0.53

0.49

15

4.11

3.9%

3.7%

4.69
1.26

4.0%
0.55

0.54
5.09
1.5

5.38

4.0%
3.0%

1.59

0.41
3.38

1.28
4.09

4.9

5.81

6.57

6.54

5.88

5.97

5.84

5.69

2.0%
1.0%

0.0%

0
2000

2001

2002

2003

Radio

% of total expenditure

20

TV
Internet and
broadband
Mobile voice
and text
Fixed voice
T otal comms

2004

Source: Ofcom / operators / licensees / BBC

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

21

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

1.4.2 Growth in broadcasting and telecoms revenues

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

22

Figure 1.9: UK communications sector revenues

bn
60

40
30
20
10

4.0%

4.1%

4.0%

10.1
1.2
10.1

3.0

3.2

10.6

12.3

11.8

11.2

10.5

2002

2003

2004

8.6
1.0
8.2
2.6
7.9

8.9
1.1
8.7
2.7
9.1

12.3

11.7

2000

2001

4%

Radio

4.1%

9.3
1.1
9.5

7.7
1.0
7
2.3
6.5

TV

3%
2%

% of GDP

3.9%

50

5%

1%

0%

Other retail
telecoms
Internet and
broadband
Mobile voice and
data
Fixed calls and
access
% GDP

Source: Ofcom / licensees / operators / BBC

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

1.4.3 Strong growth in TV advertising, but commercial radio advertising

revenues overtaken by internet advertising
The continued upturn in advertising was a key growth driver for the television
industry, which generated revenues of over 10bn in 2004 (Figure 1.10).
Nevertheless, subscriptions remained the largest single source of revenue for the
television industry, ahead of advertising income. Subscriptions rose by 10% in 2004
to 3.6bn, while advertising revenues (NAR) were up 7% at 3.5bn. TV Subscription
revenues overtook advertising revenues for the first time in 2003 and the gap
between the two was unchanged in 2004.
Figure 1.10: TV revenues 2000 to 2004
bn
4

3.5

3.4

3.1

3
2.9

2.0

2.5
2.2

1.8

3.3
3.2
2.3

3.6
3.5

Subscriptions

2.3

Net advertising
revenue

1.9

Licence fee
allocated to TV

1
0.8

0.4

2000

2001

0.6

0.5

2002

2003

0.7

Other

2004

Source: Ofcom / licensees / BBC

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

23

revenues. Other revenues (which include program sponsorship, sales from

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

4
0.33

0.14

0.29

3
2

0.14
0.29

0.15

0.31

0.16

0.30

0.18
Radio - local
commercial

3.47

3.39

3.15

3.24

3.48

2000

2001

2002

2003

2004

Radio - national
commercial
TV

1
0
Source: Ofcom / licensees

Growth in UK advertising continued in 2004 (figure 9). NAR reported by broadcasters

rose 6.6% from 3.7bn to 4.0bn. The biggest growth came from local commercial
radio which rose 7.6% to 175m but television also performed well, up 7.4% to
3.5bn. National commercial radio advertising revenues fell by 2.2% in 2004 to
299m (Figure 1.12).

24

Figure 1.12: UK advertising spend by medium

bn
15

10

0.1
0.8
2.0

0.2
0.6

0.2
0.8

0.2
0.5

0.2
0.8

0.2
0.5

0.2
0.9

0.2
0.4
0.6

1.0

0.6
0.6

Cinema
Internet

2.2

2.4

2.5

2.5

4.5

4.3

4.2

4.4

Outdoor and
transport
Direct mail

4.6

4.1

4.3

4.5

4.7

Press - display

2000

2001

2002

2003

2004

4.7

Radio

TV

Source: The Advertising Association

According to The Advertising Association total display advertising grew by 5.3% to

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

1.4.4 Mobile growth continues as fixed revenues decline

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

25

1.4.5 Television programming spend increases

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

1.4.6 The financial markets

Shares in the UK telecoms sector have risen by about 10% over the last 12 months,
slightly less than the 12% achieved by the broader FTSE index of 100 leading shares
(Figure 1.13). Despite continuing worries over competition and price erosion, the
larger telecoms companies such as BT, Vodafone and, following its recent recovery,
C&W, have been able to announce increased dividends and share buy-backs.
By comparison, the UK Media and Entertainment sector has performed poorly,
achieving a rise over the year of only 2%. BSkyB shares have recovered steadily
since their sharp fall in August 2004 following disappointing results, but remain
considerably below their year ago level. ITV shares, after touching a low point in
August last year before recovering, are virtually unchanged over the year. Radio
company shares, despite the Capital-GWR merger, have been particularly weak in
the last month or so, hit by growing worries over a deteriorating outlook for consumer
spending, and therefore advertising revenues, and also fears that some companies
may over-pay for future acquisitions.
Figure 1.13: Telecoms and media sector share index
Index: Jan 2nd 2004=100
120
110
100
90
80
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May04
04 04 04 04
04 04
04 04 04 04 04
05
05 05 05 05

Source: www.yahoofinance.co.uk

26

FTSE
Telco
Media

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

1.5.2 The importance of spectrum

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

Sector
Of which
Total radio industry *
Public Mobile
Broadcasting
Satellite Links
Fixed Links
Private Mobile Radio
Other **

Value ( billion)

Percentage

20.3

100

8.2
7.4
1.8
1.6
1.1
0.2

40
36
9
8
5
1

Source: Radiocommunications Agency estimates

Note:
*Totals may not agree due to rounding.
** other is defined to include amateur, citizens band, aviation, maritime and other equipment
and services

1.5.3 Spectrum shortages

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

27

Figure 1.15: Spectrum usage

Electric
Waves

Radio
Waves

Visible
Light

Infra-

Ultra
Violet

Gamma
Rays

X-Rays

Cosmic
Rays

Radio Spectrum
Sweetspot
3G
Long Wave
Radio
VLF

Medium Wave
Radio

LF

30
kHz

MF

300

FM
Radio

HF

LMDS
DECT WiFi
Bluetooth
GSM
Microwave
Radio Links
TV

TETRA

UHF

VHF

30
MHz

300

Increasing Range
Decreasing Bandwidth

SHF

EHF

30
GHz

300

Decreasing Range
Increasing Bandwidth

Source: Ofcom

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

Source: Radiocommunications Agency

28

1.5.4 Why is it regulated?

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

1.5.5 New approaches to spectrum management

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

29

1.5.6 Current and future balance of spectrum use

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

2000

Licence
exempt
4.3%

2010

Command
& control
21.6%

Licence
exempt
6.9%

Command
& control
95.7%

Market
mechanis
ms
71.5%

Source: Ofcom

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

change:

The transition to spectrum trading and liberalisation in relation to mobile services

The release of newly available spectrum into the market over the next 2-3 years

1.5.7 Spectrum trading and liberalisation

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

30

http://www.ofcom.org.uk/radiocomms/isu/ukpfa/intro
http://www.ofcom.org.uk/radiocomms/ifi/
Figure 1.18: Licences that have become tradable in 2004 and due to become
tradable from 2005
2004

2005

2006

2007

Other

Analogue
Public Access
Mobile Radio

Wide area
Private
Business
Radio
On-site PBR

Emergency
services

2G and 3G
mobile

Mobile satellite

Programme
Making &
Special Events
Aviation and
maritime
communication
Radionavigation
(Radar)

Satellite shared
with terrestrial
services
Radio
broadcasting

National
paging
Data networks

Digital PAMR

National and
regional PBR
Common Base
Stations
Fixed wireless
access
Scanning
telemetry
Fixed
terrestrial links

10 GHz FWA

Television
broadcasting

32 GHz
40 GHz

Source: Ofcom

In 2004, roughly 1,057 licences became tradable, with a further 37,000 licences due
in 2005 (totalling approximately 69% of all licences). Some licences contain a greater
number of assignments than others. An assignment is the spectrum frequency or
frequencies that are awarded to the licensee, some licences effectively contain sub
licences by consisting of numerous assignments. There are 50,000 assignments
which became tradable in 2004, with a further 80,000 licences to follow later in 2005.
Spectrum liberalisation allows greater freedom to decide how to use spectrum.
Traditionally, wireless telegraphy licences have specified the use to which spectrum
can be put and the means by which that spectrum can be exploited, including details
of the services that can be offered and the wireless technology and its operating
parameters. Spectrum liberalisation involves the reduction or removal of these
restrictions.
Spectrum trading and liberalisation are distinct, though complementary,
developments. Spectrum trading involves transfers of licence rights and obligations
whereas liberalisation involves the reduction or removal of licence restrictions. It is
possible to have trading without liberalisation and vice versa but liberalisation will be
an additional reform that is expected to add significantly to the benefits from trading.
In practical terms, spectrum trading and liberalisation should facilitate greater
innovation, investment and competition in the supply of wireless services.
Consumers should have access to new services more quickly, and pay less for the
services they already buy.

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A recent report produced for the European Commission by Analysys Consulting

estimates that the benefits to the European Union of spectrum trading and
liberalisation could amount to as much as 9 billion per year (and about 1 billion per
year for the UK).

1.5.8 Newly available spectrum

Ofcom expects to release new spectrum on to the market in the next 2-3 years.
Spectrum awards are likely to follow a competitive process, usually an auction, which
is likely to be an efficient mechanism as spectrum is awarded to those who value it
most highly. Ofcom intends to give the market more clarity about likely opportunities
to obtain access to areas of spectrum through the gradual release of spectrum
according to a detailed timetable of spectrum auctions. Ofcom will also provide
information concerning accessibility to new and existing licences.
The table below (Figure 1.19) summarises Ofcoms proposals for new awards in
bands below 3 GHz.
Figure 1.19: Proposed new spectrum awards
Bands below 3 GHz
1781-1785 MHz/1876-1880 MHz
(GSM/DECT guard bands)
2290-2302 MHz
2010-2025 MHz
410-415 MHz/420-425 MHz, 872876 MHz/917-921 MHz (ExInquam bands)
2500-2690 MHz
1452 -1492 MHz (L Band)
1790-1798 MHz

2005-2006

2006- 2007

2007-2008

Source: Ofcom

Ofcom also expects to make a number of awards in bands over 3 GHz during this
period (possibly at 10 GHz, 28 GHz and 32 GHz), subject to external factors such as
agreement with public service users.

1.5.9 International comparison

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

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