A Speech given to the All Party Cable
Satellite and Digital Group
by Professor Vincent Porter
Voice of the Listener and Viewer
16 December 2003
Four years ago, at the height of the dot-com boom, Chris Smith, the then Secretary of State for Culture Media and Sport, laid down three key conditions which the broadcasting, cable and satellite industries would have to meet before the analogue television signal could be switched off. They were that:
In December 2001, the Viewers Panel, which Tessa Jowell, Smith's successor as Secretary of State, had set up to advise her on issues relating to analogue switch off, concluded that it was essential for the Government to clarify and raise public awareness of the three tests. But unfortunately both the trade and the broadsheet press virtually ignored the Report (Digital Decisions: Viewer Choice and Digital Television), and since that time the Government and the broadcasting industries have done little to address the issues involved.
The advent of Freeview, and the developments in the digital marketplace which have taken place during the last two years, have made it more important than ever to focus on these questions, which is why I intend to explore these issues with you tonight.
Let us begin by looking at the domestic marketplace, which is far more complicated than many commentators are prepared to admit. According to the best estimates, there are 24.7 million homes in Great Britain that can receive television signals, but within those homes there are a total of 58 million TV sets. On average therefore, there are 2.34 TV sets in each household.
We are a nation of multiple-set households. In 18.9 million homes there are two or more sets. In 9.8 million households there are three or more sets; while in just over 4 million homes there are four or more sets. Moreover, we also love our videocassette recorders. The ITC has estimated that there are, on average, 1.5 videocassette recorders in each home It is clear that the analogue TV system was, is, and indeed continues to be, a flexible system which supports approximately four pieces of electronic receiving equipment in each household.
How then, should the Government interpret its third criterion: namely that 95 per cent. of consumers must have access to digital equipment? The oft-quoted headline figure is that nearly half the nation's households can receive digital broadcasts. In June 2003, the consumer monitoring group GfK calculated that 11.7 million British households could receive digital broadcasts. Most of them (7.2 million) were subscribers to Sky Digital, and a further 3 million were subscribers to digital cable. The remaining 1.5 million were receiving their signals terrestrially via Freeview.
If we now return to examine the number of television sets that can receive digital broadcasts, the picture appears far less rosy. According to GfK, only 15.8 million TV sets - i.e. 27 per cent. of the 58 million TV sets in this country - can actually receive digital TV. Of the remainder, 40.5 million sets (70 per cent.) are non-digital, while about 1.7 million sets (3 per cent.) can receive multi-channel TV via analogue cable.
It is clear however, that the number of television sets that can receive digital signals is a better measure of the number of consumers that have access to digital equipment than the number of households that can receive a signal. For it is generally reasonable to assume that there are more consumers in a multi-set household than there are in one which only has a single set.
It is also interesting to observe that with the advent of Freeview, viewers' purchasing patterns are beginning to change. Although approximately 90 per cent. of sales of domestic digital equipment are for the main TV sets, ten per cent. of sales are for second or subsequent sets. We still have a long way to go however, as most of the nation's second, third and fourth TV sets still cannot receive digital, and will not be able to do so without the use of an appropriate set-top box.
Moreover, the videocassette recorder was designed to allow viewers either to record analogue signals, either while they were away from home, or alternatively to record a programme on one channel, while they were watching a different channel. Unfortunately the digital hardware industry has been slow to catch up. Although it is technically possible for a free-to-air digital viewer to be able to watch one channel and record another on his VCR, it is far too complicated and too expensive for most viewers. A terrestrial viewer has to buy two set-top boxes, while the satellite viewer has to install two low noise blocks (LNBs) on his satellite dish.
VLV has therefore concluded that, before analogue switch off, 95 per cent. of television sets should be able to receive digital broadcasts and that a new, simpler and more affordable means of recording digital broadcasts on a videocassette recorder should be available to viewers.
Let us now turn to the Government's requirement for the industry to provide 99.4 per cent. digital coverage. Access to digital broadcasts is, of course, essential for every household in the land. They already have to pay for the BBC's digital broadcasts by means of their television licence fee. But in addition, the rules of the European Union only allow the United Kingdom to provide state aid to the BBC and other public service broadcasters, because it has given assurances that the BBC's licence fee revenues, together with the additional financial privileges which it accords to the commercially-funded public service broadcasters, will be used to provide broadcasting services that can be accessed by everyone.
It is a truism to observe that there are three platforms for delivering digital signals: Terrestrial, satellite and cable. What most commentators have ignored however, is that three parallel digital markets are also emerging. The first, and that most closely related to analogue TV, is the free to air market. For this, the viewer can either receive his signals terrestrially via Freeview, or in the case of BBC services, via satellite. It is also likely that Channels 3, 4 and 5 will soon be available via satellite on a free-to-air basis.
The second digital market is that for subscription television services, for which the viewer has to pay in advance. The Office of Fair Trading has already recognised this is a separate market from the free-to-air market. Under the provisions of the 2003 Communications Act however, parliament has also decided that the UK's public service broadcasters must offer their signals to both the satellite and cable platforms. This means, of course, that the commercial operators providing both platforms will also benefit from a substantial hidden public subsidy, since in addition to their own services, each of them will also be able to offer the public service broadcasts to their own subscribers.
The third digital market is the cable market, which is markedly different from either of the two broadcast markets. First, it combines the characteristics of both the telephone and broadcasting markets; and secondly, it can be a two-way interactive service, whereas the return paths on the free-to-air services and the subscription TV services that are delivered by satellite, are both extremely limited.
In each of the commercial markets, the respective platform providers - BSkyB and the two cable networks, NTL or Telewest, - occupies a dominant position - if not a de facto monopoly - in the delivery of its services. Indeed, because of the distinctive nature of the service that each platform delivers, many viewers consider them to be complementary to one another, rather than being in direct competition. For example, a viewer who does not wish to subscribe to pay-TV, or to take advantage of the interactive opportunities offered by a cable network, will only look to Freeview, or to a free-to-air satellite signal, to deliver her/his digital services.
Moreover, there is some evidence that since the arrival of Freeview, several viewers, who already subscribe to BSkyB or to a cable network, have chosen it as the delivery platform for their second or third television sets, as it is potentially more flexible than any rival platform. According to GfK, the proportion of Freeview equipment that was bought for second and subsequent sets between December 2002 and June 2003, more than doubled from 5 per cent. to 12 per cent.. For while it is true that a Sky subscriber can have an additional set-top box, s/he will still have to pay an additional subscription for that box. Furthermore, the device called TV-Link, only allows a viewer to link one TV set to another, apparently only allows that person to watch the same channel in an adjacent room.
VLV has therefore concluded that the 99.4 coverage criterion for analogue switch off, should be based on the coverage of free-to-air signals. They may, of course, be delivered by means of terrestrial or satellite transmissions. It is broadly accepted however, that terrestrial digital coverage cannot reach beyond about 82-85 per cent. of households before Analogue Switch-Off. The remaining 15-18 per cent. will therefore have to be delivered via satellite or cable. Whether or not this will be possible, is difficult to ascertain at the moment, as much detailed work still has to be done in order to assess the feasibility of receiving digital signals in dense urban or outlying rural areas of the United Kingdom. The latter is especially true in some parts of Scotland and Wales, and along the South Coast of England. Moreover, postcodes, which were designed by the Royal Mail for a totally different purpose, are a poor substitute for establishing whether or not a digital signal can actually be received by each household within a given area.
Paradoxically, the extent of digital coverage will be even more be more difficult to assess in many parts of our large metropolitan cities. The postcode criteria for assessing the coverage of digital terrestrial signals start to break down even more critically in those areas where the presence of high buildings or tall trees can often interfere with the reception of digital signals. Moreover, the spatial layout and the social organisation inside many multiple dwelling units, such as blocks of flats, means that many television sets that can currently pick up an analogue signal with a set-top aerial, will need to be connected to a far more efficient aerial system, or a satellite dish with an amplifier that can support a comprehensive distribution system, in order to receive the digital programmes. Here again, much detailed work still has to be done.
Force Majeure therefore, many inner city residents may well be forced to subscribe to a cable network, as that could be the only platform by which they can pick up their digital signals. A cable network is not, however, a free-to-air platform; and this, of course, will require the Government to examine more closely the manner in which the broadcasting industry has met its third official criterion, namely that of affordability.
In 1999, Chris Smith indicated that the Government would use digital take-up as a measure to decide whether or not digital television was affordable for the vast majority of people, including older people and those on fixed incomes. But as I have shown, it is by no means clear precisely how the take-up measure should be interpreted in practice, particularly in the light of plans to phase Analogue Switch Off across different regions.
Moreover, in many inner city areas, it will be extremely difficult for the broadcasting industry to meet the Government's target of 99.4 per cent. digital coverage unless the Government allows it to include the cable platform as one of the industry's delivery platforms. In those areas of the country therefore, viewers would be dependent on a delivery platform, for which they would have to pay a regular subscription, in order to receive their digital television signals. For these viewers therefore, affordability will not relate solely to the cost of buying capital equipment, such as a digital television set or a set-top box, but they will also incur the ongoing costs of subscribing to a new delivery platform, such as a cable network.
In short therefore, in order to assess the affordability of digital television in these parts of the country, the Government will need to develop a more sophisticated approach to assessing affordability than that which Chris Smith envisaged in 1999.
As I noted earlier, the cable platform brings together the technologies of both broadcasting and telecommunications. Moreover, under the provisions of the 2003 Communications Act, OFCOM is entitled to regulate all electronic communications systems, which includes of course cable systems.
The difficulty for the Government however, is that OFCOM's powers to regulate electronic communication systems have not been designed to deal with the type of local situation that I have described. OFCOM's regulatory powers, which stem from the EU Directives on Electronic Communication and the regulatory practices of OFTEL, are essentially concerned with supply-side competition, rather than with the delivery of free-to-air digital broadcasts to geographically specific local retail markets.
The regulator's normal aim is to establish whether a given provider of electronic communications services has Significant Market Power (SMP). To date OFTEL has found that only two of its licensees have SMP in the fixed-line telephone market: Kingston Communications in Hull and British Telecommunications everywhere else.
Although it is theoretically possible that OFCOM could develop the means to regulate the price that cable companies charge subscribers for delivering their digital broadcasts in those inner city areas where viewers cannot receive their free-to-air broadcasts from either satellite or terrestrial platforms, I consider it highly unlikely, given the current regulatory conjuncture, that OFCOM would ever do so.
Given this scenario, it would appear that the Government has three choices.
VLV has concluded that the first option, namely the provision of additional spectrum is unlikely to be technically possible, and therefore the cost of delivery by cable will need to be regulated, either by new Governmental legislation, or by the public service broadcasters through their contracts for supplying their programme services to the cable companies.
To sum up therefore, the complex nature of the domestic marketplace and the differences that are emerging between the three principal delivery platforms make it essential for the Government to refine the criteria which the broadcasting, cable and satellite industries have to meet before Analogue Switch Off.
Most viewers will rightly expect the Government to recognize that on average, the analogue broadcasting system currently supports several pieces of receiving equipment in each household. They will expect digital broadcasts to do the same.
Secondly, digital coverage is likely to be most problematic in both distant rural and inner city areas. Moreover, the use of post-codes by the broadcasting authorities is often a poor surrogate for deciding what signals are actually available. No decision on coverage should be taken therefore until more detailed studies have been carried out on the ground.
Thirdly, in some areas, digital take-up, however it is measured, will be an insufficient measure of affordability. Where viewers who live in inner city areas, or in multiple dwelling units, have to rely on the local cable platform to receive their digital broadcasts, those viewers will consider it necessary for the Government to put in place a mechanism to regulate the price for which those digital broadcasts are delivered.
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