The Communications Market 2006

1 Overview

Published : 10 August 2006

11

Contents
1.1 Introduction

13

1.2 Key communications themes

14

1.2.1 Communications consumers get more for their money

14

1.2.2 Young people are moving away from old media

14

1.2.3 Competition in bundling heats up

15

1.3 The year in communications

17

1.3.1 Introduction

17

1.3.2 Availability: 3G and LLU extend reach of communications services

17

1.3.3 New services over existing platforms

20

1.3.4 New services over new platforms

23

1.3.5 New ways of watching and listening

25

1.3.6 Competition and technology help to deliver lower prices

27

1.3.7 Take-up: digital TV penetration grows, broadband now mass-market

29

1.4 The communications industry

32

1.4.1 Introduction: the emergence of bundled products

32

1.4.2 New technologies may require new pricing structures

33

1.4.3 Overall broadcasting and telecoms revenues reach 50.6bn

33

1.4.4 Subscriptions drive TV revenue growth, with advertising slowing

34

1.4.5 The financial markets

36

1.5 The communications consumer

38

1.5.1 Introduction

38

1.5.2 Spend declines despite increased usage

38

1.5.3 Consumption more broadband, more TV, less radio

39

1.5.4 Consumption patterns are changing for young adults

40

1.6 Spectrum

44

1.6.1 Introduction: an important component of the communications market

44

1.6.2 New uses of spectrum

44

1.6.3 Spectrum auctions

45

1.6.4 Spectrum trading

46

1.6.5 Digital Dividend Review

46

1.6.6 Ultra Wideband (UWB)

46

1.6.7 Cave audit

47

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1.1 Introduction
This report is the third in a series of annual Communications Market reports, the
latest of which was published in August 2005. This edition covers developments
across the electronic communications and media sectors in the UK for the calendar
year of 2005 with additional analysis for the period to June 2006 where available.
The Communications Market supports Ofcoms aim to provide best-in-class research
to which stakeholders have regular access. It aims to give a comprehensive picture
of the radio, telecommunications and television sectors, with a round-up of recent
developments and the latest available data on:

industry size, structure and financing;

availability, penetration and use of products and services; and

consumer attitudes and behaviour.

This edition follows a year in which consumers have started to feel the impact of
converged communications services. At the device level, phone calls can now be
made over the internet while the internet can be accessed using mobile handsets;
equally television and radio programmes can now be enjoyed over both broadband
and mobile phones. Also, at the operator level, the distinction between broadcaster,
mobile operator, and fixed-line or broadband provider is blurring in each case
there are examples of industry players bundling services together in innovative
ways, in an effort both to attract and retain customers.
While this report contains separate sections for the radio, telecoms and television
sectors, descriptions of converged services can often be found in more than one
section for example the recent trials of radio and television to mobile phones
feature in all three. In each case we try to look at such services from a different
perspective. In future reports, as services converge further, we will aim to present our
analysis in a way which reflects the way they are offered and used more closely.
Ofcom welcomes comment on the content and style of the Communications Market
report to help inform future publications. Suggestions and queries should be sent to:
market.intelligence@ofcom.org.uk.
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 position
for the purposes of the Communications Act 2003, the Competition Act 1998 or other
relevant legislation. We endeavour to ensure that the data in this report are the most
accurate currently available.

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1.2 Key communications themes

1.2.1 Communications consumers get more for their money
In 2005, for the first time in five years, average UK household spend on
communications fell slightly, from 4.63% to 4.60%, as a proportion of total household
expenditure. Despite growth in take-up of many key services 3.8m more broadband
connections, 5.8m more mobile connections and 2.7m net additional digital TV
households (of which 441,000 subscribed to pay TV) total 2005 communications
spend per household rose in real terms by just 0.6% (54 pence) to 87.67.
This was almost entirely because of falling prices, particularly in the fixed-line sector,
where average household spend decreased from 25.90 to 23.60/month, largely
offsetting increased mobile, broadband and broadcasting spend. We can see this
more clearly if we apply 2005 telecoms usage levels to 2001 prices; average spend
on telecoms services would have been 15% higher in real terms at 71.94 per
household in 2001, against 60.96 in 2005.
These data show that, in simple terms, consumers are using more and paying less.
This is largely due to a combination of increasing competition, new delivery
platforms, innovative pricing and marketing, and regulatory intervention where
necessary. However, this trend looks set to continue: further increases in
competition, combined with innovative service bundling, could increase the
downward pressure on prices over the next year; wide-scale local loop unbundling
(LLU) should give operators new ways of packaging and pricing broadband and
fixed-line services; and new ways of delivering TV and radio programming (primarily
via broadband and mobile platforms) could result in increasing competition and a
broader range of service offerings.
1.2.2 Young people are moving away from old media
In 2005, we noticed a further shift in communications consumption patterns among
the young (16-24 year old) age group. While it is true that usage of media, telecoms
and technology has always varied by age, this difference has become more marked
over the past year.
Younger people have embraced the multitude of new technologies and means of
communication, to the detriment of traditional platforms and services. For example,
in a multi-channel TV world, younger viewers now watch less public-service
broadcasting output than ever before (share of viewing to terrestrial channels among
1624 year olds is down from 74.3% of their viewing time in 2001 to 58% in 2005)
opting instead for newer digital channels that might better reflect their values and
interests. In radio, too, this age group is listening to proportionately less analogue
and local commercial output than average and is instead replacing it with digital
listening and output from the newer national commercial services.
A similar theme emerges in telecoms, where young adults are forsaking fixed-line
telephony in favour of mobile calls and texts 16-24 year old subscribers make on
average seven more calls and send 42 more texts per week than the population as a
whole. They also spend more time online; young adults who use the internet do so
for 21 more minutes per week than the UK average and at least 70% of them have
used websites for keeping up contacts (against 41% of all adults).
These are the children of the internet age, many of whom have never known a life
without home computers, games consoles, mobile phones and online connectivity.

14

They are accustomed to more on-demand delivery of services: they want to contact
their friends whenever and however is most convenient; they expect to watch TV
programmes and listen to radio stations which interest them; they want to create their
own online presence, and connect directly to others with similar tastes and interests.
1.2.3 Competition in bundling heats up
Throughout 2005 and early 2006, many operators started combining a number of
different communications services known as bundling. The first players to bundle
services were the cable operators, which were able to offer TV and fixed-line
telephony from their inception in the mid 1990s. The bundling aspect of these early
offers was usually merely a single billing relationship for customers, and sometimes a
single point of customer service. When the cable companies also began to offer
broadband internet, in the early 2000s, they started giving discounts to customers
who took two or three services.
Until around 2003, the cable companies were the only operators that could offer any
kind of cross-platform bundles: every player in the communications sector only
owned or operated one type of service (mobile, fixed-line, broadband, TV), with the
exception of BT which has operated fixed-line and broadband services since 2000,
but marketed them separately. However, the introduction of commercially-viable
wholesale line rental (WLR), which gave any company the chance to sell voice and
broadband products over fixed lines rented from BT, opened the door to the first
fixed/broadband bundles.
At the same time, WLR gave operators with existing strengths in other platforms (TV
and mobile for example) the opportunity to bundle their core product with broadband,
or fixed-line voice, or both. This received fresh impetus with the introduction of
changes to the regime for local loop unbundling (LLU) in 2005. LLU gives operators
the chance to effectively take over operation of local exchange lines from BT, thereby
establishing a unique fixed-line relationship with the consumer. In August 2005, BT
voluntarily reduced the fully-unbundled line rental charge from 109 to 80 per
annum, and Ofcom subsequently set price ceiling rules to guard against future LLU
price increases.
While BSkyB had tried a basic TV/fixed-line bundling strategy in the 1990s by
establishing a marketing deal with BT, by 2005 it could use LLU to bypass BT
altogether. BSkyB signalled its intention to do just that with its acquisition of Easynet,
one of the UKs largest LLU operators, in October 2005. Other operators that
introduced new bundled offers during 2005 and early 2006 include:

Carphone Warehouse used LLU to offer new subscribers free broadband

for life provided they took the fixed-line rental plus calls bundle. This offer
surpassed the companys expectations, with over 340,000 new subscribers
pre-ordering the service in the first eight weeks after the announcement;

Orange rebranded its Wanadoo broadband ISP and began to offer free
broadband to customers who spent more than 30 each month on an Orange
mobile contract;

O2 appeared to follow suit by acquiring LLU operator Be in June 2006;

BSkyB announced the introduction of free broadband for all of its pay TV
subscribers in July 2006;

15

BT trialled a fixed/mobile offering in 2005; and

Ntl acquired Virgin Mobile in early 2006, giving it the potential capability to
offer quad-play services: TV, fixed voice, mobile and broadband.

We may see bundling becoming more intelligent meaning that there is some level
of true service convergence, rather than a series of stand-alone services being
offered under the same marketing and billing umbrella. For example,
mobile/broadband bundles could make it possible for subscribers to remotely access
their central email and diary functions more seamlessly, regardless of whether they
were at their PC or away from home using their mobile device. The evolution of TV
over broadband also brings a potentially new element to the bundling product set.

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1.3 The year in communications

1.3.1 Introduction
During 2005, the UK communications market played an increasingly important part in
consumers daily lives. Take-up of new digital services proceeded at pace driven by
increased availability, greater choice, innovative consumer offerings and falling
prices. We examine each of these factors in turn in this section.
1.3.2 Availability: 3G and LLU extend reach of communications services
2005 was a year where sections of the telecommunications industry continued to
push aggressively to maximise their potential customer base. Although many
platforms (2G mobile, fixed-line, satellite TV) had already reached near-universal
availability, during 2005 and early 2006 there were increases in the availability of 3G,
broadband and unbundled local exchanges (LLU) (Figure 1.1).
Figure 1.1: Availability of digital communications services
UK wide
2006

UK wide Increase on
2005
2005

Wales

Scotland

N Ireland

(percentage
points)

Platform
Fixed line
1
Mobile (2G)
2
3G
3
DSL
4
LLU
5
TV over DSL
6
Digital cable
Satellite TV
7
DTT
DAB digital radio

England

100.0%
99.9%
90.5%
99.9%
44.0%
10.0%
45.0%
98.0%
73.0%
89.0%

100.0%
99.0%
82.0%
96.0%
34.0%
5.0%
45.0%
98.0%
73.0%
89.0%

0.0%
0.9%
8.5%
3.9%
10.0%
5.0%
0.0%
0.0%
0.0%
0.0%

100%
100%
97%
100%
49%
12%
48%
n/a
73%
8
92%

100%
100%
76%
100%
15%
0%
23%
n/a
57%
8
73%

100%
99%
68%
100%
29%
0%
37%
n/a
82%
8
92%

100%
100%
89%
100%
0%
0%
30%
n/a
58%
8
92%

From Q3 2005. Percentage of postal districts where at least one operator reports at least 75% area coverage
From Q3 2005. Percentage of postal districts where at least one operator reports at least 25% area coverage
3
Percentage of premises connected to a DSL-enabled exchange based on data reported by BT in January
2006; however, some premises may not be suitable for delivery of broadband services due to local technicalities,
such as distance from exchange or poor quality of networks
4
Percentage of premises connected to an LLU-enabled exchange at January 2006
5
Represents availability of Homechoice, the only UK television delivered via DSL
6
Total cable availability (including analogue) reached 50.4% of the population in March 2006 (source: operators)
7
Figures relate to availability of signals from all six multiplexes
8
Figures relate to local multiplex licensed population coverage rather than transmitter coverage
2

Source: Ofcom / operators / licensees

Note: For a more detailed explanation of availability figures please refer to Ofcoms Communications
Market: Nations and Regions report, published in April 2006.

At the end of 2005, second generation mobile services were available from at least
one operator to a 75% geographic coverage level in 96.9% of postal districts, and
82.4% of postal districts were similarly covered by all four operators (Figure 1.2).
When mapped onto population density in those areas, our analysis shows that 99.9%
of the UK population live in postal districts with 75% geographic coverage by at least
one 2G mobile operator.
90.5% of postal districts had a minimum 25% geographic 3G coverage offered by at
least one mobile operator, while 46.2% received services from four or five operators

17

(our criteria for coverage require operators to be able to provide downlink bandwidth
levels of at least 128kbit/s one of a number of possible thresholds for advanced
data and video services. The postcode coverage threshold is lower than for 2G
services owing to both technological considerations and to reflect the newness of 3G
services).
Figure 1.2: Geographic coverage of mobile services by postal district

2G coverage (75%)
Four operators
Three operators
Two operators
One operator
Zero operators

3G coverage (25%)
Five operators
Four operators
Three operators
Two operators
One operator
Zero operators

Source: Ofcom / operators, Q3 Q4 2005.

According to BT, by Q1 2006 99.9% of UK premises were connected to a DSLenabled exchange. However, some premises within these exchange areas are not
suitable for delivery of broadband services, or only broadband at lower speeds,
owing to local technicalities such as distance from the exchange or poor quality of
networks.
Local loop unbundling (LLU) entails physically disconnecting BTs local lines from its
network and connecting them to other operators networks, enabling them to provide
their own services to customers. The number of unbundled lines started to rise
steeply in late-2005 and early-2006, following wholesale price reductions from BT
and the introduction of a price-capping regime by Ofcom. In December 2005 there
were 210,000 unbundled lines, but by June 2006 a further 370,000 lines had been
added, taking the total to 580,000.
Following the closure of Kingston Interactive Television (KIT) in February 2006,
which had been available to 105,000 homes in the Hull area of East Yorkshire, TV
over DSL (delivered over an unbundled exchange) was available to approximately
2.4m homes in the London area by May 2006. These services were provided by
Homechoice, which has stated that it plans to work with alternative providers of
unbundled services to extend its coverage area throughout 2006 and 2007.
The UKs newly merged main cable operator ntl:Telewest also provides broadband
connectivity. Its broadband service is delivered via fibre-optic and coaxial cable
(rather than BTs copper wire local network), and delivers speeds of up to 10 Mbit/s.
Digital cables availability to 45% of UK homes has remained unchanged over the

18

last year (Figure 1.3) and ntl:Telewest has stated its intention to extend its reach via
local loop unbundling of BT lines, rather than by building new cable.
Figure 1.3: Availability of digital cable and digital terrestrial television, DTT
Cable coverage

DTT coverage

Source: Ofcom
Note: Coverage areas are indicative only

Satellite remained the digital television platform offering the widest coverage in 2005.
Although the footprint covers the whole of the UK, actual availability to households
can be limited due to factors such as obstruction to the line of sight to the satellite,
local topography and planning restrictions. According to BSkyB, 98% of households
in the UK and Ireland can get the Sky digital satellite service.
Digital Terrestrial Television (DTT) coverage also remained constant during the year,
with 73% of UK households able to receive services from all six multiplexes (Figure
1.3). The Highlands and Islands of Scotland and upland areas of England and Wales
still had significant reception problems by the end of 2005. Also, in Northern Ireland
there were only three transmitters as of December 2005, limiting coverage to the
region.
Availability of DAB (Digital Audio Broadcasting) digital radio remained static in 2005,
with 89% of the UK population covered by at least one and in most cases all three
of the multiplexes operated by Digital One, the BBC and local commercial
broadcasters (Figure 1.4) (In addition digital radio services are available to digital TV
and internet homes).

19

Figure 1.4: DAB digital radio coverage 2006

Source: Ofcom
Note: Coverage areas are indicative only

1.3.3 New services over existing platforms

During 2005 and early 2006, a number of factors including technology
developments, accessibility to multiple delivery platforms at low cost, and innovative
business models all helped consumers to listen to, view, interact with, use and
store information in new ways, and to get more from their communications services.
The number of broadcast digital TV channels and radio stations increased again;
operators launched TV services to mobile devices; the amount and variety of audio
and video content available via the internet continued to rise and the number of
households with personal video recorders (PVRs, capable of recording television on
a hard disc drive) grew rapidly during the year.
New television and radio services
Reduced costs and ample capacity through the use of digital technology have made
it easier for broadcasters to target a more narrowly defined audience with niche
channels.
In 2001, three years after digital television launched on satellite, BSkyB offered 198
non-terrestrial channels on its Sky service and these channels commanded
approximately 39% of multichannel viewing. The remaining 61% share was to the
main terrestrial channels, BBC1 through to five, and their associated digital spin-offs.
The following four years witnessed rapid growth in the number of channels, with the
launch of a further six terrestrial spin-offs (excluding the relaunches of BBC Choice
and BBC Knowledge) and a net addition of 138 non-terrestrial channels (Figures 1.5
and 1.6). This increase in channel choice was a key driver of consumer take-up of
multichannel television, which doubled between 2001 and 2005 to over 18 million
households.

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Figure 1.5: Spin-off channel launches from the five main channels
Operator

Channel

Launch

Closed/replaced

BBC

BBC News 24
BBC Parliament
BBC Choice
BBC Knowledge
CBBC
CBeebies
BBC Four
BBC Three

November 1997
September 1998
September 1998
June 1999
February 2002
February 2002
March 2002
February 2003

ITV

ITV News
ITV2
ITV3
ITV4
CITV
ITV Play

August 2000
December 2002
November 2004
November 2005
March 2006
March 2006

Channel 4

Film Four*
E4*
Quiz Call
More4

November 1998
January 2001
August 2005
October 2005

February 2003
March 2002

December 2005

* Launched originally as subscription services

Source: Ofcom

Figure 1.6: Channel availability

400

13
5

300

Terrestrial spin-offs
7

200

Main five terrestrial

336

100

Non terrestrial

198

0
2001

2005

Source: Ofcom / BARB

However, in some ways, the five mainstream channels taken together with their spinoffs have benefited more than new operators from the growth in multichannel
television; viewing share of their spin-off channels rose from 3% to 9% in
multichannel homes between 2001 and 2005, more than offsetting the 1.2
percentage point drop in share of the parent channels. The share of non-terrestrial
new channels meanwhile fell from 39% to 34% in multichannel homes, as audiences
grew but fragmented (Figure 1.7).

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Figure 1.7: Multichannel share of viewing in multichannel homes, 2001 2005

9.1m

2001 viewing share

Main five
terrestrial
58%

18.1m

Total multichannel homes

2005 viewing share

Non
terrestrial
39%

Main five
terrestrial
57%

Terrestrial
spin-offs
3%

Non
terrestrial
34%

Terrestrial
spin-offs
9%

Source: Ofcom / BARB

The radio sector, too, has also been able to offer greater availability and choice
through digital distribution. Many stations have embraced television, the internet and
DAB, as a means of increasing their coverage (Figure 1.8)
Figure 1.8: Radio stations launching on the national DAB multiplex
Group

Station

Launch

BBC

5Live Sports Extra

6Music
1Xtra
BBC7

Feb 2002
Mar 2002
Aug 2002
Dec 2002

GCap

Core
Planet Rock
Life

Nov 1999
Nov 1999
Jan 2000

Other

PrimeTime
ITN News Radio
Bloomberg Radio

Nov 1999
Aug 2000
May 2001

Closed

May 2006
Jul 2002
Dec 2002

Source: Ofcom

However, as with television, the existing national groups have often been the key
beneficiaries of wider availability. Share of listening to national stations increased
from 49% in 2001 to 55% in 2005. Although the number of local radio stations
increased by 37 to 366 during this period, their share of listening declined by 5.7
percentage points.
Clearly listening share is affected by factors other than just increased availability.
However, a look at the strategies of the BBC, Virgin and Emap illustrates how some
of the larger radio groups have taken advantage of the digital opportunity:

22

The BBC has launched new stations 6Music, BBC7, Five Live Sports Extra, the
Asian Network and the World Service on DAB, digital television and the

internet. These stations contributed to an increase in the BBCs total share of

listening of 2.4 percentage points over the four years to 2005.

Since 2005, Virgin has launched a series of stations on DAB, digital TV and the
internet, including Virgin Radio Classic Rock and Virgin Radio Groove. The new
stations have helped to off-set some of the share loss on Virgin AM.

In 2003, Emap Radio launched the four magazine-branded digital stations Heat,
Kerrang!, Q and Smash Hits. With distribution over the internet, Freeview and
some DAB local multiplexes, these stations have benefited from crosspromotional opportunities and wide digital distribution.

New telecoms services

In the telecoms sector a number of services either came to market or evolved
significantly during 2005 and early 2006. Among these was residential voice over IP
(VoIP), which moved from being a niche product towards becoming a much broader
consumer offering. This evolution was driven by a number of factors, including
greater overall consumer awareness of VoIP, and new devices which simplify the
user experience. In May 2006, for example, Vonage introduced a VoIP handset
which plugs straight into an ADSL-enabled wall socket, rather than requiring the user
to switch on their PC; and in June 2006 BT launched its new Home Hub, which
allows users to plug any handset straight into a phone socket on the hub itself.
Other developments in telecoms services included a continued rise in the volume
and breadth of mobile content from new ring tones to user-generated video
channels. Similarly, in broadband, new content is continually being added with
notable growth in intelligent websites such as last.fm, a music download site that
interrogates users PC music libraries and suggests further music they might like.
1.3.4 New services over new platforms
TV over broadband
The continued rapid uptake of broadband to the home has provided a significant
addressable base to which rights holders can distribute their content. This has
benefited not just the major broadcasters, for whom the internet offers a new way to
reach new (and existing) customers, but also small rights holders and even
individuals, who can now distribute their programming. During 2005 and early 2006
significant barriers were overcome and internet distribution now seems to be a key
strand in the growth strategies of many broadcasters.
New service launches and trials at the beginning of the year were designed to
optimise this internet viewing experience; BSkyBs Sky by Broadband service and
the BBCs integrated Media Player (iMP) trial both exploited peer to peer (P2P) file
sharing technology to overcome the limitation of a 500kbit/s internet connection and
deliver reliable, high quality video by exploiting free storage in the form of the
consumers computer hard disk drives (HDD) to store the content before viewing.
During the course of the year broadband technologies and speeds continued to
improve, with up to 2Mbit/s broadband connections becoming increasingly common
and up to 8Mbit/s available in some areas. These developments, along with
improvements in video compression technologies, have resulted in a growing number
of operators offering video services which are streamed in real time, without the need
for local storage on the viewers computer.
Details of some of the key services currently available include:

23

The BBC commenced the trial of its integrated Media Player (iMP) in
September 2005. It allows users to download TV and radio programmes from
the bbc.co.uk website to their PC for consumption up to seven days after
transmission;

BSkyB launched Sky by Broadband, its video download service in January

2006, offering movies and sports clips via the internet. The service is
available to eligible Sky digital customers at no extra charge;

AOL launched its IPTV service, In2TV, in November 2005, with full-length
episodes of popular TV shows and interactive programmes, including quizzes
and games;

Channel 4 launched FourDocs in June 2005, which gives viewers an

opportunity to showcase their own four-minute documentaries, and offers an
online archive of Channel 4 documentaries; and

MTV launched Overdrive in April 2006, featuring music, news and video
trailers.

Although these organisations use software to manage and protect their digital rights,
the continued threat of piracy and illegal downloads remains an issue for many
content owners. In an Ofcom survey, 83% of internet users were aware that there are
illegal ways to access films, music and computer software on the internet but 33% of
these believed illegal downloads should be legal (Figure 1.9). Interestingly, this figure
jumps to 50% when looking at the younger 16-24 age demographic.
Figure 1.9: Attitudes to downloads that are currently classified illegal
Percentage of internet users aware that there are illegal ways to access content
Should be illegal

Should not be illegal

All users

54%

Broadband users

53%

Dial-up users

Aged 16-24

13%

33%

10%

37%

18%

24%

57%

10%

50%

40%

Aged 55+

Don't know if it should be illegal

67%

20%

13%

Source: Ofcom research, summer 2005

TV to mobile devices
In addition to broadband distribution, most of the UKs mobile network operators have
introduced TV services to mobile devices over the last year. Development has
occurred on two fronts; higher speed mobile data connections provided by 3G
networks have allowed streamed television and downloaded video clips to be

24

delivered to mobile handsets, while trials seeking to bring the efficiency of broadcast
networks to deliver television services to mobile phones have also taken place.
The first generation of television services on mobile phones are delivered using 3G
technology on traditional one-to-one mobile data connections (known as
narrowcasting as opposed to broadcasting or one-to-many). Consequently, if two
customers watch the same broadcast content at the same time, they each use
capacity on the 3G network. Although most network operators now offer such
services, adoption is relatively low and so this inefficiency of transmission is not a
major concern. However, as take-up increases, alternative technologies may need to
be deployed to address this scalability issue.
BT Movio and Virgin Mobile have recently completed trials in London of a broadcast
technology that allows television services to be broadcast via the DAB digital radio
network. Using this DAB-IP technology, users with compatible mobile handsets are
able to receive both digital radio and digital television services and, as it is a
broadcast technology, there is no limit on how many users can receive the service at
any particular time. The trial offered radio alongside a limited range of television
channels and resulted in consumption of around one hour of television per week
alongside 95 minutes of radio.
While DAB-IP is an evolution of the standards developed for digital radio, an
alternative technology called DVB-H (Digital Video Broadcasting - Handheld) is a
derivation of the technology behind digital TV. In conjunction with Nokia and
broadcast network operator Arqiva, O2 conducted a trial in Oxford in 2005 using a
DVB-H network, which revealed that viewers watched on average just over three
hours of mobile TV per week.
1.3.5 New ways of watching and listening
PVRs
By March 2006, there were over 1.4 million subscribers to BSkyBs Sky+ personal
video recorder (PVR) service, with 0.8 million net additions since December 2005
alone. At the heart of these devices is a hard disk drive (HDD) which allows digital TV
programmes to be stored, randomly accessed and replayed with no reduction in
picture quality. The capacity of the standard Sky+ set top box has increased from 40
to 160 gigabytes, while retail prices have fallen.
The reducing price of HDD storage is leading to the inclusion of PVR functionality in
an increasing number of consumer devices. Key PVR offerings which have come or
are coming to market include:

Telewest launched its TV Drive PVR in March 2006. It is HD (High

Definition) capable, and can simultaneously record two programmes while the
viewer watches a third;

BT has announced that its BT Vision hybrid DTT/IPTV set top boxes will
include a local HDD;

A number of new Freeview PVRs have been launched. The Freeview

consortium has announced a marketing campaign later this year under the
Freeview Playback brand; and

25

Top Up TV (the subscription service available over the Freeview platform)

has announced its intention to launch its Anytime PVR product in autumn
2006.

Having an accessible base of HDD-enabled set top boxes may provide platform
operators with an opportunity to introduce new services in which broadcast
programmes, advertising and other content can be pushed onto the disk and then
made available to the consumer on demand, or potentially, in the case of advertising,
based on user behaviour and preferences.
Video and audio on the go
The advent of the MP3 system for compressing digital audio, along with the iPod
device and iTunes download service from Apple, were both important in reinventing
the idea of music on the go. However, there is evidence of a similar trend emerging
in video, TV and radio content.
Portable TV sets have been available for many years; indeed Seiko produced one
integrated into a wristwatch in 1982 and cheap mass market hand portable units
were available by the end of the 1980s, but take-up has been limited. However, with
the growth of digital technology there are now many devices which allow the viewing
of stored digital video on the move, in addition to broadcast mobile television.
Examples include:

Portable DVD players The most common device for watching stored video
on the move is a portable DVD player with integrated screen. These have
fallen rapidly in price and are now available for under 100. Due to the
constraints of accommodating the DVD disc they remain fairly large and
power hungry items.

Hard disk based portable media players The latest version of the iPod is
equipped with a colour screen and can display videos and photos stored on
its hard disk. The UK iTunes download service now also supplies video as
well as music, with music videos and animated short films available. In the
US, iTunes also offers TV shows and some full length DVDs for download.
Other portable media players are available, some of which have larger
screens optimised for video display, such as those made by Archos, Creative
and iRiver.

Sonys Playstation Portable (PSP) While primarily a games console, this

device can also play videos stored either on its own optical disk format (called
UMD) or the devices memory card. Over 100 movies are available on UMD.
Sony also offers a free video download service with clips ranging from film
trailers to music videos and interviews. The company has announced plans to
launch a movie download site, hoping to do for films what iTunes did for
music.

Paces planned PVR2GO device operates much like a standard PVR, but
includes a removable unit containing a hard disk and small screen for viewing
while away from the TV set. This suggests the line between in-home personal
video recorders (PVRs) and portable media players may be starting to blur.

Radio too is addressing customers desires to control their listening and viewing
habits. The BBC Radio Player which offers on-demand listen again services had
a record month in March 2006, with more than 20 million hours of online listening and

26

12 million on-demand requests. In April 2006, The Archers was the most demanded
programme with over 650,000 requests.
While listen again programmes are only available for seven days after broadcast,
and are streamed through an internet connection, MP3 downloads can be kept
indefinitely; podcasting is simply an automated form of MP3 downloading. Although
there is no definitive list of the most downloaded podcasts, iTunes reported that the
most downloaded shows via their application were:

Baddiel and Skinner (Times Online);

Ricky Gervais free video podcast;

Best of Moyles (Radio 1);

The World Cup on Guardian Unlimited; and

The Now Show (Radio 4).

High-definition TV
As the cost of digital storage reduces, and the speed and capacity of digital networks
continue to improve, the data requirements for digital TV are set to increase further
with the introduction of more channels and the advent of high definition TV (HDTV).
HDTV services typically require 4-6 times the amount of data to carry video
information as standard definition services. Using current compression technologies,
such as MPEG2, this would significantly increase the amount of storage and network
capacity required. The commercial deployment of the latest compression
technologies, such as MPEG4, over the last year, promises to reduce these
requirements significantly, reducing the costs associated with delivering these
services to consumers.
BSkyB and Telewest both currently offer commercial HDTV services in the UK, and a
trial of HDTV over the digital terrestrial platform is underway in the London area. The
Sky service costs 299 for an HD set top box (which also has the PVR functionality
of the Sky+ service), and an additional 10 monthly subscription for a selection of
content from Sky One, Skys sport and movie channels, together with HD versions of
National Geographic, Artsworld, Discovery and a BBC HD channel. Telewests
service has no upfront cost, but for an additional 10 or 15 a month (depending on
the TV package to which they subscribe) customers get an HD-enabled PVR. The
Telewest service currently has two channels BBC HD and ITV HD.
1.3.6 Competition and technology help to deliver lower prices
During 2005 and the first half of 2006, increased competition in the communications
sector, coupled with advances in technology, have benefited the customer in terms of
greater availability of services, more choice from a broader product offering, and, in
many cases, lower real prices.
Prices in the pay-TV sector remained broadly flat over the year, although the cost of
new products and services such as high-definition TV and PVRs was passed on to
subscribing customers. However, the price of telecoms services fell again; our
analysis suggests that spend on a selection of these services, based on 2005
average household consumption levels, fell by 6.2% in real terms between 2004 and
2005, and was over 15% lower than in 2001 (Figure 1.10). For example, in 2001 it

27

would have cost the average household 31.32 to use mobile voice and text services
at 2005 levels, compared to 30.45 for the same usage levels in 2005. This reflects
the fact that the fall in prices over this period has more than offset the increase in the
number of mobile subscribers per household.
Figure 1.10: Real cost of average household telecoms consumption
per month, 2005 prices

80

73.37

70.80

60

10.4
2.1

8.4
2.1

7.4
2.1

5.6
2.0

31.3

31.4

31.3

32.1

30.5

40

68.19

65.16

Broadband
60.96
5.4
1.6

18.8

18.1

16.8

14.9

13.0

10.8

10.8

10.5

10.6

10.6

2001

2002

2003

2004

2005

20
0

Dial-up
Mobile voice
and text
Fixed voice
calls
Fixed access

Source: Ofcom / operators

Note: Assumes consumption is at 2005 levels across all years. Includes VAT; excludes NTS voice calls.

Although there have been real falls in the price of fixed voice services and mobile
calls and text, the biggest drop since 2001 has come in broadband, where improved
technology has allowed operators to offer ever-higher speeds without concurrent
price increases. Retail offers are continually changing, but a subscription to an entrylevel service typically cost less than 10 per month by May 2006. This compares with
a 1-1.5Mbit/s connection costing between 30 and 35 per month in December 2004
(Figure 1.11).
Figure 1.11: Average UK residential broadband subscription prices
per month

50

50.0
512kbit/s

40 45.0
30
20

41.0
35.0

35.0

27.0

26.0

30.0
23.0

15.0
10.0

10
0
2001

1Mbit/s
16.0

2002

2003

2004

>1Mbit/s

2005

Source: Ofcom
Note: Prices are an average of the top four UK ISPs, and are for stand-alone broadband subscriptions.
Most operators no longer market a 512kbit/s product.

In addition, bundling of services to the customer has become a key part of operators
strategies to reduce broadband prices. The biggest surprise in the competitive pricing
model was probably Carphone Warehouses (CPW) free broadband offer,
introduced in March 2006 and designed both to grow its broadband base and also to
entice its TalkTalk fixed-line subscribers to a bundled broadband product. Orange

28

responded to CPWs price drop in May 2006, offering free broadband to customers
who also took out an 18-month mobile contract at 30 per month or more.
1.3.7 Take-up: digital TV penetration grows, broadband now mass-market
The mobile and broadband sectors were the key drivers of growth in the UK telecoms
industry in 2005, while digital terrestrial television and DAB take-up also grew
strongly. Figure 1.12 shows penetration of key communications services and devices
as at Q1 2006, plotted on the technology adoption S curve.
Figure 1.12: Adoption curve for communications services and devices, Q1 2006
100%
Fixed line

2G mobile

75%
Take-up

Digital TV

50%
Broadband
Portable music player
Games console
VoIP

20%
PVR

3G mobile
DAB Radio

0%
Innovators

Early
Adopters

Early
Majority

Late
Majority

Late
Adopters

Source: Ofcom
Note: penetration of DAB radio, 3G mobile and VoIP are based on individuals; other technologies are
based on households

Total mobile subscriptions grew by 5.8m in 2005 to 65.5m. This figure represents
over 100% of the UK population, reflecting the increasing number of users with
multiple subscriptions and increased business use. Household penetration of mobile
phones (i.e. homes with at least one mobile subscription) was approximately 90% as
of Q1 2006 a near-saturation figure compared with 71% in 2000. By comparison,
fixed line penetration was 90%, having declined from 94% since 2000.
3G mobile adoption also increased markedly during 2005, growing 66% to 4.8 million
subscriptions (8% of the population), reflecting a significant marketing push from the
main mobile operators. 3UK retained the greatest market share at 77% of
subscriptions, with Vodafone at 15%, and the remainder split between Orange, O2
and T-Mobile.
By May 2006, there were more than 11 million broadband connections to homes and
smaller businesses in the UK. We estimate that DSL broadband (at a minimum of
512kbit/s) is now available to over 95% of homes and businesses in the UK, in
addition to the 45% of UK homes passed by cable broadband (which can currently
deliver broadband internet at up to 10Mbit/s).

29

Penetration of digital TV reached 73% in the first quarter of this year, or 18.3 million
households. Digital terrestrial was the main driver, with over 7 million homes now
using Freeview on their primary TV set outnumbering the number of analogue-only
households for the first time. Digital switchover is due to commence in 2008
beginning with the Border region, at which point take-up can be expected to
accelerate.
It is interesting to see how much more quickly consumers are adopting digital
technology than analogue. Figure 1.13 shows that it took over 40 years for analogue
television sets to penetrate 73% of households. However, for digital television the
same position has been reached in just eight years (although many digital homes still
have unconverted sets) (Figure 1.13).
Figure 1.13: TV penetration - all TV households and digital TV households
Percentage of households

Digital
switchover

100%
80%
All TV
households

60%

Multichannel
TV introduced

40%

Digital TV
households

Digital TV
introduced

20%
0%
1935

HDTV
introduced

Colour TV
introduced

1945

1955

1965

Freeview
introduced

1975

1985

1995

2005

2015

Source: Ofcom, BARB

Ownership of audiovisual devices has also grown strongly over the past year. Ofcom
research suggests that household penetration of portable music players increased
from 18% in December 2005 to 35% by March 2006, driven by growth in MP3
players; ownership is skewed towards males and 15-24 year olds (Figure 1.14).
And in addition to the 2.5 television sets per household, there has been strong
growth in the number of computers that allow owners to watch TV or video. This has
been accompanied by increased take-up of devices which affect the way
programmes are watched; DVD player ownership is stabilising at around 70% of
households, but now that penetration of PVRs has reached around 8% (and 29% of
households own recordable DVD devices) we may start to see some substitution of
the VCR, or at least see it being moved to second and third TV sets.

30

Figure 1.14: Take-up of other household audiovisual devices

Percentage of households

100%
87%

82%

87%

85%

80%

Video recorder

82%
80%
73%

70%
69%

68%

Digital television

70%

60%
40%

85%

DVD player

50%
59%

41%

38%
28%

20%

17%

10%
2%

0%
2000

27%

13%

11%
6%

3%

5%

2001

1%

8% 11%

2002

2003

29%

18%
20%

PC with TV/video
capability

8%

5%

3%

2%

MP3 player

35%

29% 28%

45%

PVR

2004

2005

Q1 2006

Source: Ofcom research / estimates

A comparison of availability and penetration of the major digital communications

services reinforces the fact that, while take-up always lags availability, the mobile,
broadband and DTT service providers have been particularly successful at reaching
their addressable market in a comparatively short space of time (Figure 1.15).
Figure 1.15: Availability and penetration of digital services

99.9

98.0

Percentage of UK households

100

Penetration

Penetration of addressable market

99.9
89.0

100

90.5

90%
73.0

80

80

60
33.8%

90.0

40

37.8%

40

11.1

20

SL

0.2
0
2.0%

ov
er

TV

8.0

Br
oa
db
an
D
d
AB
di
gi
ta
lr
ad
io
3G
M
D
ob
ig
i ta
i le
lt
er
re
st
ria
lT
V

TV

Sa
te
lli t
e

/2
.5
G

10.0

27.6
11.0

(2

8.9%

TV

12.4%

ab
le

41.0

33.1

ob
il e

60

51.8
24.7%

20

41.0%

Percentage of addressable market

Availability

Source: Ofcom / operators / licensees, end 2005.

Note: Figures for radio and 3G are for individuals not households

31

1.4 The communications industry

1.4.1 Introduction: the emergence of bundled products
Before examining revenues and sources of funding for the communications industry,
it is instructive to look at some of the new business models and pricing structures
being adopted by service providers.
During 2005, many major communications service providers re-evaluated their
revenue, cost and investment models to reflect changes in the market. Consumers
increasingly perceive communications services as commodity products, with
purchase criteria driven largely by price. In such an environment, some operators can
add value by branding, grouping and marketing their services in innovative ways.
A significant manifestation of this is the increase in service bundling, which is
evolving to become a critical tool in offering better value to the consumer. Through
bundling, operators hope to increase revenue and margins, reduce churn, and
achieve efficiencies through increased cross-service use of infrastructure. (In this
report, we define bundling in its broadest context: that of an operator offering multiple
services under a single brand with a bundled retail price and a single bill covering the
bundle. Bundling may also include a truly converged package where services are
available across multiple networks and devices).
One illustration of this focus on bundling has been the recent offers of broadband
services by some mobile network operators. A key enabler of this has been the
improved ability to offer retail services directly to customers rather than taking
wholesale products from BT. By accessing the local loop, operators typically incur
higher fixed costs to install equipment at the exchange but lower wholesale charges,
which can result in higher operating margins.
Consumers have demonstrated considerable interest in some of these products;
Carphone Warehouses new bundle, which incorporates free broadband and will be
available to customers in July 2006, was demanded to such a great extent after its
announcement in March that the company has warned there will be delays in
connecting new customers.
Figure 1.16 below illustrates the evolution of bundled services since the cable
operators first started offering TV and telephony in 1995.

32

Figure 1.16: The evolution of communications service bundling

Number of services in bundle

Broadband offered via LLU

NTL/
(Virgin)

3
Cable
Operators
Cable
Operators

BT
Fusion

Orange
(Wanadoo)

O2 (Be)

Carphone
Warehouse

BT

BSkyB

1995

2002

2003

March
2006

2005

April
2006

May
2006

June
2006

Time

Source: Ofcom
Note: Chart refers to time when bundles were first announced

1.4.2 New technologies may require new pricing structures

Voice over Internet Protocol (VoIP) could potentially prove disruptive to the business
models of some mobile operators. If substantial voice traffic were to be delivered by
VoIP, operators could experience revenue erosion. This threat might be mitigated
through adoption of flat rate charging structures for broadband access; for example,
as part of Carphone Warehouses free broadband offer, customers must also
subscribe to a fixed line call subscription of 9.99 per month (in addition to a line
rental of 10.99 per month).
Another area where pricing models are still evolving is on-demand, broadband
delivery of television and radio programmes, where consumers propensity to pay
has not yet been heavily tested. Much IPTV content (such as that in the BBC trial) is
currently free, and those operators that have a pay offering have not marketed it
particularly aggressively. Channel 4 and MTV have only offered a limited number of
signature programmes as part of their pay offerings, although the AOL Film
Download service suggests online content pricing could reduce rental or purchase
prices for consumers as a result of lower distribution costs.
Most of these new operator strategies and revenue models are still in their infancy,
and their impact has yet to be fully felt in reported results.
1.4.3 Overall broadcasting and telecoms revenues reach 50.6bn
Overall broadcasting and telecoms retail revenue increased by 5% to 50.0bn in
2005, equating to 4.1% of GDP (Figure 1.17). The bulk of this (38.3bn) and the
biggest annual rise (2.0bn) came from the telecoms sector. Growth in 2005
television revenue was 4%, compared to 9% growth between 2003 and 2004.
Combined net radio advertising and BBC radio spend declined marginally to 1.1bn.

33

Figure 1.17: UK communications retail sector revenue

bn

% GDP

80
60

4.0%

4.0%

4.1%

4.1%

4%

4.1%

TV
3%

40
20

8.6
1.0

8.9
1.1

9.3
1.1

10.2
1.2

10.6
1.1

36.3

38.3

Radio
2%

Telecoms

30.3

32.2

34.4

2001

2002

2003

1%

% GDP

0%

2004

2005

Source: Ofcom / licensees / operators / BBC

In 2005, the mobile sector contributed 13.1bn of retail revenue a 9% increase on

2004. The fixed-line market continued to decline, with a reduction of 800m, or 8%,
year-on-year. Internet and broadband revenues grew from 2.9bn to 3.4bn. Other
retail telecoms revenue (which includes elements from the wider telecoms value
chain, such as mobile handset subsidies and a range of other value-added services)
increased by 11% to 9.1bn (Figure 1.18).
Figure 1.18: Analysis of UK telecoms retail sector revenue
bn

40
30
20

Other retail
6.8

7.5

8.1

9.1

2.2
2.0

2.3
2.5

2.5
2.9

2.6
3.4

Corporate
data services

7.9

9.0

10.4

12.0

13.1

Internet and
broadband

12.4

12.2

11.6

10.9

6.2
2.1
1.7

10
10.1

0
2001

2002

2003

2004

2005

Mobile voice
and data
Fixed calls
and access

Source: Ofcom / licensees / operators

1.4.4 Subscriptions drive TV revenue growth, with advertising slowing

TV industry revenue rose by 401m (4%) in 2005 to reach 10.5bn (Figure 1.19).
Subscriptions (including pay television, PVR, high definition and multi-room services)
totalled 3.9bn; net advertising revenue rose to 3.6bn; while public funding
contributed 2.4bn.
The growth in total revenue was driven largely by an increase in subscriptions earned
by BSkyB, NTL and Telewest. These rose by 8.5% in 2005 to reach 3.9bn and now
exceed net advertising revenue by a 10% margin. This is a result of a slow down in
net advertising revenue growth to just 1.9% in 2005 (following two years of average
5% per annum growth) which contrasts with five-year average growth of 14.5% for
the pay-TV sector. This is turn has been driven by:

34

an increasing subscriber base;

a change in the mix of subscribers;

price increases; and

take-up of new services.

Public funding continued to play an important role in UK broadcasting. In 2005,

Ofcom estimated that the funding allocated by the BBC to television stood at 2.4bn,
up 5% on 2004. Other revenue (which includes non-broadcast revenue such as payper-view, retail sales from shopping channels and premium rate telephony) has
remained steady, at 0.7bn (Figure 1.19).
Figure 1.19: TV revenue 2001 to 2005
bn

5,000
4,000

3,891
3,471

3585

3,385

3,481

3,000

Net advertising
revenue

2883

2049

2,000
1,820

3,548

3,242

2476

1,000

Subscriptions

3252

3,147

2,216

2,302

781

650

534

2001

2002

2003

2,319

2,433

Licence fee
allocated to TV

1,934

397

746

749

2004

2005

Other

0
2000

Source: Ofcom / licensees / BBC

In radio, total industry revenue declined by 1.7% in 2005 to 1.15bn the first fall
since 2001. This decrease was principally due to a fall in commercial revenue of
43m to 519m, with national commercial down 32m to 269m (despite an increase
in listening share of 0.5 percentage points) and local commercial down 11m to
164m (Figure 1.20). The BBCs expenditure on radio in 2005 was estimated by
Ofcom to account for 55% (626m) of radio industry funding.
Figure 1.20: Radio industry revenues
bn

1.2
1.02

1.08

1.13

1.17

1.15

Total
BBC
expenditure

0.8
0.52

0.57

0.58

0.61

0.63

Total
commercial

0.54

0.56
0.30

0.52

National
commercial

0.4 0.50
0.29

0.51
0.29

0.14

0.15

0.31
0.16

0.07

2002

0.0 0.06
2001

0.18

0.27
0.16

0.07

0.09

0.09

2003

2004

2005

Local
commercial
Commercial
sponsorship

Source: Ofcom

35

The combined net advertising revenue of commercial TV and radio grew by less than
1% in 2005 to 3.98bn, comprising a 1.9% increase in television to 3.6bn, offset by
a 7% decline in radio to 0.43bn (Figure 1.21).
Figure 1.21: Growth of UK broadcasting net advertising revenue
bn

0.14
0.33

0.14
0.29

0.15
0.29

0.16
0.31

3.15

3.24

0.16
0.27

0.18
0.30

Radio - local
commercial

3
2

3.47

3.39

Radio - national
commercial

3.55

3.48

1
TV
0
2000

2001

2002

2003

2004

2005

Source: Ofcom / licensees

An analysis of the wider advertising market shows that total spend on display
advertising grew by 2.1% in 2005 to 16.0bn (Figure 1.22). While newspapers,
television, and direct mail accounted for 71.1% of this, internet advertising grew by
73% year-on-year to 1.1bn, increasing its share of total display spend from 4.2% to
7.1%. Internet advertising has now overtaken business magazines to become the
fourth largest display advertising medium in the UK; it is nearly three times larger
than radio advertising and more than a third the size of television.
Figure 1.22: UK advertising spend by medium
bn (2000 prices)
Cinema

16.0

12.0

14.1

0.8
0.8
1.2

14.1

0.2
0.5
0.2

0.8
0.8
1.1

14.5

0.2
0.5
0.2

0.8
0.9
1.0

15.3

15.2

0.2
0.6

0.4

0.8
0.9
1.0
0.8

0.2
0.6

0.8
1.0
1.0
1.3

2.2

2.3

2.4

2.3

2.2

3.5

3.6

3.6

3.8

3.8

8.0

0.2
0.5

Radio
Consumer
magazines
Outdoor and
transport
Business
magazines
Internet
Direct mail

4.0
4.8

4.7

4.7

4.9

4.6

TV
Newspapers

0.0
2001

2002

2003

2004

2005

Source: The Advertising Association

Revenues at constant 2000 prices

1.4.5 The financial markets

Shares in the UK telecoms and media sectors have underperformed the FTSE100
since the start of 2005. The telecoms index (fixed and mobile) rose by 2% in the

36

period to late June, while the media sector (including broadcasters, publishers and
advertising agencies) was unchanged; by contrast, the FTSE 100 index gained 17%
(Figure 1.23).
Figure 1.23: Telecoms and media sector share index
130
120
FTSE
110
Media

100

Telco

90
80
Jan05

Feb05

Mar05

Apr05

May- Jun- Jul-05 Aug- Sep05

05
05
05

Oct05

Nov05

Dec05

Jan06

Feb06

Mar06

Apr06

May- Jun06
06

Source: uk.finance.yahoo.com

The Price to Earnings (P/E) ratio, a commonly-used valuation measure which relates
share price to earnings per share, has reflected downward revisions to growth
prospects for the telecoms sector, particularly in mobile. For Vodafone, by far the
largest component of the UK telecoms index, the P/E ratio was a relatively low 11 in
late June 2006 compared to an average for FTSE100 companies of 12.6 and for
the telecoms sector as a whole of 11.6 (Figure 1.24).
Figure 1.24: PE ratio and dividend yield in media and telecoms sectors
Measure
Telecoms sector
PE ratio
Dividend yield
Media sector
PE ratio
Dividend yield
FTSE100
PE ratio
Dividend yield

Jun
2005

Dec
2005

Jun
2006

13.8
3.1%

13.5
3.3%

11.6
5.1%

20.7
2.3%

19.1
2.3%

23.8
2.5%

14.7
3.2%

14.0
3.1%

12.6
3.3%

Source: FT.com; data points for the last working day of the month

A similar pattern is reflected by changes in dividend yield (annual dividend payments

per share expressed as a percentage of the share price). The average dividend yield
on telecoms stocks was high in late June, at 5.1%, compared to the UK base rate of
4.5% and an average yield among FTSE100 stocks of 3.3%.
By contrast, the media sector is seen by investors to be a higher growth area, with an
average P/E ratio of around 24, and a dividend yield of 2.5%, This sector contains a
broad range of stocks, which may explain its resilience in spite of share price falls for
broadcasters such as ITV and GCap, which were affected by lower advertising
revenue growth than was expected by analysts.

37

1.5 The communications consumer

1.5.1 Introduction
Use of communications services in 2005 continued its recent upward trend. However,
despite increased consumption, average spend on media and telecoms services
declined as a percentage of household income for the first time in five years an
indication that the communications sector is delivering better value for the consumer.
In this section we explore how consumption has changed in 2005 generally, and then
focus on emerging trends in consumption among the young.
1.5.2 Spend declines despite increased usage
From 2001 to 2004, increased availability and choice, coupled in some cases with
cheaper services, have contributed to a significant increase in consumption, reflected
in a rise in communications spending as a proportion of total household spend from
4.07% in 2001 to 4.63% in 2004. The biggest increase was attributable to mobile
voice and text, followed by television services.
However, in 2005, average monthly household spend on communications services
levelled out at 87.67, up 54 pence on 2004 in real terms. This was echoed by a fall,
albeit a slight one, in communications spend as a proportion of total household
expenditure, from 4.63% to 4.60% (Figure 1.25).
Figure 1.25: Average monthly household communications spend
per month, 2005 prices

100

Share of total household spend

4.37%
4.07%

80
60
40
20

2.3
19.5

2.5
21.9

4.63%

4.60%

2.4

2.4

2.4

23.0

23.6

24.3

4.55%

5%

Radio

4%

TV

5.6

6.1

6.9

Internet and broadband

4.4

3%

3.6
19.4

22.8

26.2

29.2

30.5

2%

Mobile voice and

messaging

30.7

29.7

27.9

25.9

23.6

1%

0%

2001

2002

2003

2004

Fixed voice
Communications as
share of total spend

2005

Source: Ofcom / operators / licensees / BBC

A closer comparison of 2005 spend with 2004 shows that the reduction was driven by
a fall in average spend per month on fixed-line services of 2.82, although this was
largely offset by increased mobile, internet and television spend, leaving a net
monthly increase of 54 pence per household (Figure 1.26).

38

Figure 1.26: Change in real household communications spend (2004 to 2005)

Change in average monthly communications spend (2004-2005)

1.00
1.28

0.50
0.00
-0.50
-1.00

0.85

0.70

Fixed voice

Fixed voice

Mobile voice and

messaging

Internet

TV

0.02

0.54

Radio

Total

-2.31

-1.50
-2.00
-2.50
-3.00
Source: Ofcom / operators / licensees / BBC
Note: Based on constant 2005 prices. Apportionment of BBC licence fee to radio and TV based on
Ofcom estimates.

1.5.3 Consumption more broadband, more TV, less radio

Total time spent consuming and using communications services showed a modest
increase over the four years to 2005 (Figure 1.27). Average television viewing went
up by 11 minutes to 25 hours and 34 minutes per week, while radio listening
experienced a decline of 24 minutes per week over the same period. Time spent by
mobile subscribers making calls and sending SMS text messages both grew strongly
but in absolute terms time spent online by internet users went up most, reflecting
growing penetration and the increasing number of always on broadband
connections.
Figure 1.27: Weekly communications consumption
Usage per week
TV viewing hours
Radio listening hours
Telephone call minutes
fixed
mobile
Number of SMS texts
Internet hours

2001

2005

Change

25:23
20:30

25:34
20:06

+11 mins
-24 mins

1:11
0:20
5.5
2:10

1:10
0:22
11
2:29

-1 min
+ 2 mins
+ 5.4
+ 19 mins

Source: Ofcom / operators / RAJAR / BARB / TGI-BMRB

Note: TV and radio hours are per individual; call minutes and SMS text messages are per connection;
weekly internet hours are for Q4 of each year for adults 15+ who have used the internet in the last 12
months.

Perhaps another driver of internet use is the growing popularity of social networking
and blogging websites. Sites such as MySpace, Friendsreunited and Bebo, used to
establish and re-establish social contacts and communicate with communities, are
among the top 50 most visited in the UK. Blogs (a type of website where users post
entries in a chronological order, which can be publicly viewable or limited to particular
users or user communities) are also generating great interest: there were over 35
million blogs worldwide in April 2006 and a new one is created every second,
according to tracking service Technorati. In addition, the internet is increasingly used

39

for downloading content to personal devices, including MP3 file sharing, movie
downloads and audio and video clips.
1.5.4 Consumption patterns are changing for young adults
Our research and analysis suggests that young adults (16-24) have embraced new
technologies to a far greater degree than the general population, while they use the
more traditional media of television and radio considerably less (Figure 1.28). Mobile
phone (calls and texts) and internet use are well above average for this age group
and our research suggests that 16-24 year olds regard the mobile phone as their
primary telecoms platform (for example, 85% say they would use a mobile text or call
as the preferred method of arranging to meet a friend, compared to 46% for all age
groups).
Figure 1.28: Weekly communications consumption by age group
Usage per week
TV viewing hours
Radio listening hours
Mobile phone use
Number of mobile calls
Number of SMS
Internet hours

All age
groups

16-24

Difference

25:34
20:06

18:21
18:18

-7h 13mins
-1h 48 mins

20
28
2:29

27
70
2:50

+ 7 calls
+42 SMS
+ 21 m

Source: Ofcom / operators/ RAJAR / BARB/ TGI-BMRB

Note: TV and radio hours are per viewer/listener; SMS is the self-reported number of messages sent per
mobile user; weekly internet hours are for Q4 of each year for adults 15+ who have used the internet in
the last 12 months.

At the same time, this age group has embraced online communication activities our
research shows that 70% of internet users aged 16-24 have used social networking
websites (compared to 41% of the general population), with over half doing so on a
weekly basis. They are also much more likely to contribute content: 37% of 18-24
year olds have posted material online (compared to 14% across all age groups),
while close to one in five have their own website or blog (section 3.4.17 discusses
this in greater detail).
The drop in listening and viewing hours of young adults is probably also partly
explained by their higher ownership of most new technologies than the population as
a whole. For example, over half own a games console and / or an MP3 player and
they also appear to have a higher propensity to consume in an innovative manner;
38% of young adults view TV over their PCs, compared to only 24% of all individuals
(Figure 1.29).

40

Figure 1.29: Use of entertainment devices in the home

Percentage of adults
72%
73%

Teletext TV
51%

Video Recorder

66%
71%
62%
59%
57%
55%

DVD
Internet
MP3

15-24 year olds

29%

All adults

56%

Games console

24%

PC for TV viewing

24%

38%
7%
5%

PDA
0%

20%

40%

60%

80%

Source: Ofcom research, April 2006

16-24 year olds watch substantially less television than older people and their
viewing is declining at a faster rate, down by over one and a half hours, to 18 hours
and 18 minutes per week, over the past four years (against a 1% rise for the adult
population). In addition, their exposure to television is declining; just 84% watched at
least an average of 15 consecutive minutes per week in June 2006, whereas the all
individuals figure was 92% (Figure 1.30).
Figure 1.30: Average weekly reach of television (2001 2005)
100%

95%

94%
93%

92%

93%

92%

All inviduals

90%
87%

85%

80%
2001

86%

16 - 24 year olds
85%
84%

84%

2002

2003

2004

2005

Source: BARB
Note: 15 minute consecutive reach

This fall may be due to a desire among young adults for a different type of content
offering. This hypothesis is reflected in the growing share of their viewing to
multichannel television up from 30% in Dec 01 to 41% in Dec 05 (Figure 1.31).

41

Figure 1.31: Channel share by month for 16-24 age group (all homes, all day)
100%
30%

28%

31%

32%

31%

35%

80%

40%

42%

41%

Non-terrestrial
channels

60%
40%

70%

72%

68%

69%

69%

65%

60%

58%

59%

Terrestrial
channels

20%
0%
Dec-01 Jun-02 Dec-02 Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05
Source: Ofcom / BARB

Of course, lower viewing of the main terrestrial channels is mirrored among the
general population as multichannel penetration increases. However, Figure 1.32
shows the disproportionately higher fall among 16-24 year olds for each of the last
four years.
Figure 1.32: Change in percentage share of viewing to terrestrial channels

Terrestrial
viewing share

% reduction in share year on year

2
0

80.4% 74.3%
78%

70.5%

-2

-1.6

-2.4

-4

76.4% 68.6%
-1.9

73.8% 64.4%

70.4% 58%

-2.6

-3.8

-4.2

-3.4

-6
-6.4

-8
2001

2002
All individuals

2003

2004

2005

16-24 year olds

Source: BARB

In radio, too, there appears to be a shift towards newer services and different
consumption patterns among young adults. Although total listening among this age
group has risen by 5% over the past five years, this has been driven by a 118%
increase in listening to the newer national commercial services (and a 12% rise in
BBC radio listening), offsetting a 12% fall in local commercial services which have on
average been around longer (Figure 1.33). In addition, a greater proportion of their
listening time is spent listening to digital when compared to other age groups.
It is also interesting to note the 17% fall in listening among 25-34 year olds again
largely driven by less local listening to commercial radio (down 30%).

42

Figure 1.33: Change in radio listening between March 2001 and March 2006
Percentage change in annual hours listened

National commercial

Radio universe

237%
118%

35%

Local commercial

BBC all

30%
26%

25%
15%

20%

5%

5%

3%

14%

12%

11%

8%

10%

6%

5%
1%

2%

0%

-5%

-3%

-6%
-10%
-12%

-15%

-11%

-17%

-25%
-30%

-35%
Children

15-24

25-34

35-44

45-54

55+

Source: RAJAR

Ofcom research suggests that among internet users the activity which has suffered
most as a result of being online (either because less time is available or because the
internet provides the required information) is TV viewing with 18% saying they
watch less (Figure 1.34).
However, again there is a markedly different pattern for young adults (15-24 year
olds). For all categories of media, except television, more young adults reported a
greater reduction in consumption than the population as a whole, suggesting the
internet has a far greater substitution effect on other media for young adults. But the
more established media of newspapers, magazines and radio were particularly
affected, although interestingly games console use also fell significantly.
Figure 1.34: Reduced consumption resulting from increased internet use
Percentage of respondents

Use games
consoles

Listen to
radio

Read
Read
Read local
Watch
national
magazines newspaper video/DVD newspaper Watch TV

0%
-2%
-5%

-10%

-2%
-7%

-5%

-4%

-5%
-8%

-8%

-12%

-8%

-8%

-12%
-15%

-14%

-20%

-13%
-18%

-21%

-18%

-22%
-27%

-30%
All individuals

15-24 year old

45-64 year old

Source: Ofcom research, April 2006

Question: since using the internet for the first time, which if any of the following activities do you believe
you undertake less?

43

1.6 Spectrum
1.6.1 Introduction: an important component of the communications market
The availability and efficient use of spectrum is important in a well-functioning
communications market. Figure 1.35 below shows that the defence sector still
commands the greatest single proportion of available spectrum (despite the release
of parts of its allocation to the commercial sector over the past ten years). The next
largest user of spectrum is the fixed/satellite sector this includes point-to-point
microwave communications links which form part of the telecoms network, and
satellite uplink/downlink. Interestingly, cellular spectrum (i.e. the spectrum used for
mobile communications) comprises only 5% of the total.
Figure 1.35: UK spectrum use weighted by frequency (weighted)

Other
7%

Emergency
services
2%

Business radio
Cellular
5%
4%
Aeronautical and
maritime
14%

Defence
30%

Science
1%

Fixed / satellite
24%

Broadcasting
13%

Source: Ofcom
Note: This has been weighted such that a 1MHz allocation at 100MHz is given equal weighting to a
10MHz allocation at 1GHz.

1.6.2 New uses of spectrum

Over the past two decades, a number of new technologies which make more efficient
use of spectrum have emerged. These technologies have evolved from research
laboratories through to full commercial availability, and many now play an important
part in consumers everyday lives. They include:

Digital Audio Broadcasting (DAB), a technology developed by a group of

manufacturers and broadcasters to provide radio services in a digital format.
In 1995, the BBC carried out the first DAB broadcast in the UK and services
now operate in VHF Band III (217.5-230 MHz).
DAB uses spectrum more efficiently and is based on a standard which utilises
techniques to make the radio signal robust against sources of interference
and weather conditions unlike FM transmissions, where these adverse
effects are translated into a hissing or crackling sound.

44

Wireless Fidelity (WiFi), a wireless technology, operating in the licenceexempt bands at 2.4 GHz and 5 GHz, that allows users to connect to an
access point to from a wireless local area network (WLAN). Users can also

access the internet if the access point has appropriate connectivity. WiFi
access points (also known as hotspots) typically have a range of about 100
metres. As WiFi operates in licence-exempt bands, it is subject to power
restrictions to minimise the effects of interference.
WiFi is based on variants of the IEEE 802.11 standards and latest versions
support a data rate of around 100Mbit/s using MIMO (multiple input multiple
output) technology. BT Openzone was one of the earliest service providers to
offer WiFi hotspots in the UK in 2003, and as of mid 2006 there were
approximately 14,600 public hotspots in the UK, in locations such as airports,
hotels, railway stations and town centres.

Bluetooth, a short-range wireless communication technology aimed at

replacing the use of cables for connecting mobile and/or fixed devices such
as mobile phones, headsets, MP3 players, printers and PDAs.
Like WiFi, Bluetooth operates in the 2.4GHz licence-exempt band. However,
to minimise interference with other wireless technologies operating in the
same band, Bluetooth uses an adaptive frequency-hopping technique to
detect and avoid the frequencies used by neighbouring devices. Bluetooth is
a low-power technology: most Bluetooth-enabled devices have a range of
about 10 metres and support data rates of 1-3Mbits/s.

3G, or the Universal Mobile Telecommunications System (UMTS), the third

generation mobile communication system and the successor to the 2G Global
System for Mobile communication (GSM) standard. Both UMTS and GSM
have been widely adopted in Europe and beyond, which has led to
economies of scale and made roaming easier for users who travel
internationally.
3G services are licensed in the UK in the frequency bands 1900-1980 MHz
and 2110-2170 MHz. The former band is used to transmit signals from the
mobile to the base station (uplink) and the latter to send signals from the base
station to the mobile (downlink). In March 2000, the Radiocommunications
Agency (RA) held an auction for five 3G licences in the UK, raising just under
22.5 billion, while similar auctions were subsequently held in other European
countries. Three years later, 3UK started the first commercial 3G network in
the UK.
3G services support higher data rates than GSM (up to about 384 kbit/s),
which has enabled use of new services such as mobile video telephony and
mobile music track downloading. As UMTS establishes itself further,
operators are already looking to boost its speed using HSDPA (High Speed
Downlink Packet Access) and HSUPA (High Speed Uplink Packet Access)
technologies.

1.6.3 Spectrum auctions

The first spectrum auction since Ofcom was established took place on 20 April 2006.
This was in line with the recommendations made by the Spectrum Framework
Review to allow market forces to have a greater say in determining how spectrum is
used. Following publication of a consultation document and a statement in July and
November 2005 respectively, Ofcom made available for auction twelve licences at
the frequencies 1781.7-1785 MHz paired with 1876.7-1880 MHz. The licences are
technology neutral but are on a low-power basis. Possible uses include private GSM

45

mobile phone networks in office buildings or campuses. Fourteen companies

participated in the single-round sealed bid auction, and the total licence fees paid
were 3.8 million.
Further UK-wide auctions are in the pipeline for a number of bands including:

412-414 MHz paired with 422-424 MHz

872-876 MHz paired with 917-921 MHz
1452-1492 MHz
10, 28 and 32 GHz

A further spectrum auction in conjunction with the Republic of Irelands telecoms

regulator, ComReg (Commission for Communication Regulation), is planned for the
1785-1805 MHz band, with one licence being made available in Northern Ireland and
one in the Republic of Ireland.
1.6.4 Spectrum trading
Towards the end of 2004, Ofcom authorised spectrum trading allowing the holders
of certain categories of wireless telegraphy licences to transfer all or part of their
rights and obligations under a licence to another party.
The first spectrum trading in the UK occurred in 2005-2006. Fourteen applications for
licence trading were received by Ofcom during the year. Eight of these trades had
been completed by May 2006, and consent had been granted by Ofcom for the
remaining six. This represented a little under 2% of the licences for which spectrum
trading was available during the year.
In April 2006, Ofcom published a consultation document on spectrum usage rights
(SURs) proposing a new way of specifying the emissions that a licence holder might
transmit in neighbouring bands and locations.
1.6.5 Digital Dividend Review
In September 2005, the UK Government announced that analogue television would
be gradually phased out between 2008 and 2012, and replaced by its digital
counterpart which is about six times more efficient. The switchover to digital services
will result in the release of up to 112 MHz non-contiguous spectrum in the UHF band.
This freed-up spectrum known as the digital dividend could enable the launch of
a wide range of services encompassing advanced business and broadcasting
services, wireless broadband services and additional television channels using
standard or high definition.
In November 2005, Ofcom announced the launch of its Digital Dividend Review,
which will examine issues such as possible uses for the digital dividend, technical
limits on spectrum use to prevent interference, and mechanisms for making this
spectrum available to the public. Ofcom aims to publish a consultation document
before the end of 2006, before taking its final decision by mid-2007.
1.6.6 Ultra Wideband (UWB)
At the beginning of 2005, Ofcom consulted on the position it should adopt in Europe
on ultra-wideband devices in the 3.1-10.6 GHz band. Following feedback from
manufacturers, operators, other national stakeholders and results from research
projects, we outlined the UK position with respect to UWB. This was then used as an
input to broader discussions on UWB at European level.

46

1.6.7 Cave audit

In 2002, Professor Martin Cave published a study, The Review of Radio Spectrum
Management, dealing with the application of market forces to commercial spectrum
management. More recently, in December 2005, an audit of public spectrum holdings
was carried out by Professor Cave and a team of experts based at Ofcom.
The audit was intended to encourage the public sector to make more efficient use of
its spectrum holdings, by identifying spectrum where immediate or medium-term
reallocation is feasible. It also investigated the possibility of extending market
mechanisms to the public sector, and the provision of incentives for more effective
spectrum management.
In an atmosphere of ever-increasing demand for limited spectrum, the Cave audit
recognised that public spectrum holdings represent the majority of spectrum which
will have to be made available for additional commercial use in the future. In this
respect, the audit recommended that Recognised Spectrum Access should be used
to define the spectrum rights of Crown bodies. Furthermore, it recommended an
increase in bandsharing through appropriate incentives to bodies managing the
bands, and the investigation of new technologies to allow bandsharing in bands that
were previously excluded for such purposes. In case public bodies lack the
commercial expertise to engage with commercial organisations, the report suggested
the appointment of a third party to liaise between the public and commercial sectors.

47

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