Introduction
This is Ofcom’s sixth annual Communications Market Report, offering industry, stakeholders
and consumers a re...
The information set out in this report does not represent any proposal or conclusion by
Ofcom in respect of the current or...
Contents
Introduction                                   1 
Key Points                                     4 
1        The ...
Key Points




Key points: the market in context
Key market trends

            Availability of key communications servic...
Consumers’ use of digital video recorders (DVR)

      More than a quarter of consumers (27%) claimed to use a DVR at the...
Key points: television
       Total television industry revenue grew by 1.3% to reach £11.2bn in 2008. This was
        l...
Key points: radio
    Total UK radio industry funding stood at £1.15bn in 2008, down by 2.3% on 2007.
     This followed ...
Key points: telecoms
   For the first time since Oftel started to collect market data in 1992/93, operator-reported
    r...
Key points: converging markets
    Online catch-up TV began to enter the mainstream in 2008, largely thanks to the
     g...
The Communications Market
                    2009
  1




      1   The market in context




                           ...
Contents
  
 1.1 Introduction and structure                                                     13 
 1.2 Key market trends...
1.1 Introduction and structure
This section of the Communications Market Report 2009 summarises a range of
communications ...
1.2 Key market trends
1.2.1 Introduction, structure and findings

Introduction

This section provides an overview of key t...
Key developments in availability include:

      •       moves to increase the speed of broadband connections. Super-fast ...
8. DAB digital radio coverage figure based on a BBC/Digital One estimate. Both the BBC and Digital
One built new transmiss...
by subscriptions, up 5.7% in 2008 to reach £4.3bn, while net advertising revenue decreased
by 2.9% to £3.5bn.Telecoms reve...
1.2.6 Consumers are spending growing amounts of time on the internet

The shifting pattern of communications service consu...
Figure 1.6      Overall satisfaction with communications services




Source: Ofcom research, Q1 2009
Note: Shows the prop...
broadband and multichannel TV ‘triple play’ (34%). Take-up of bundles was as high as 68%
of individuals in Bristol, to 62%...
Figure 1.9        Which media activity would consumers miss the most
 100%                                                ...
Figure 1.10             Proportion of households using the internet for listed activities
 % of households who use the int...
1.3 Communications markets and the recession
1.3.1 Introduction, structure and key findings

Introduction

Since the last ...
(page 31); and the recession is motivating some to shop around more for the best
          deal on communications services...
Figure 1.12       Consumer attitudes towards the recession
On a scale of 1 to 5, where 5 is ‘extremely worried’ and 1 is ‘...
Figure 1.13         Items where consumers are most likely to cut back their spending
Items mentioned as first, second or t...
Figure 1.14     The communications service where consumers would be most likely to
cut spend
Proportion of individuals sel...
Figure 1.15 Consumers’ agreement/disagreement that they were more likely, in the
context of a recession, to take communica...
Figure 1.16 Consumers’ propensity to renew their handset now, compared to 12
months ago
Proportion of respondents agreeing...
Figure 1.18 Increased likelihood of consumers keeping/taking out a pay-TV
subscription now versus 12 months ago
Proportion...
There was also recognition among some consumers that some communications service
providers are offering better deals now t...
Figure 1.21 Consumers who are more likely to shop around for their
communications service now than a year ago
Proportion o...
Figure 1.22          Media and telecoms share performance against FTSE 100

 120


 100
                                  ...
In the telecoms sector, the increasing use of mobile phones rather than fixed-line phones
continued to have a significant ...
contrast, rose by 6.6% over the period, reflecting the growing popularity of digital television
platforms and the greater ...
Ofcom - The Communications Market in UK 2009
Ofcom - The Communications Market in UK 2009
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Ofcom - The Communications Market in UK 2009
Ofcom - The Communications Market in UK 2009
Ofcom - The Communications Market in UK 2009
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Ofcom - The Communications Market in UK 2009

  1. 1. Introduction This is Ofcom’s sixth annual Communications Market Report, offering industry, stakeholders and consumers a reference tool to track the development of the UK communications sector. The report also provides an important context for the work that Ofcom undertakes in furthering the interests of consumers and citizens in the markets we regulate. As well as providing data and analysis on the UK television, radio and telecoms markets, this report also focuses on relevant trends and developments in adjacent industries such as music and gaming. These sectors are increasingly important to our understanding of changing communications markets; consumers are dividing their time among a growing range of media types, platforms and devices. At the same time, companies are identifying ways in which new platforms and media can help bolster established revenue streams. The UK communications industry continued to grow in 2008, albeit at a slower rate, driven by telecoms and television subscription revenue. It generated £51.8bn in 2008, up 0.2% year on year. Free-to-air advertiser-funded services such as television and radio saw their revenues fall as they felt the impact of an economic downturn. Early indicators suggest that advertising revenue has dropped further in 2009. This year, we have commissioned our own research into how consumers’ attitudes towards communications services have been affected by the downturn. Amid this economic uncertainty, the Government’s Digital Britain report, published in June 2009, aimed to ensure the UK communications industry emerges from the recession as strong and internationally competitive. The European Commission has followed with its Digital Europe initiative. But the progress of the communications industry has been substantial. At the end of March 2009, nine in ten homes had digital television; two-thirds of the nation had broadband; nearly a third had access to a DAB digital radio set; one in five radio listener hours in 2008 was through a digital platform and nearly a quarter of mobile subscriptions, or 17.9 million, were to 3G services. More than a quarter of homes had digital video recorders and in the report we provide a detailed analysis on consumer habits and usage of these devices. And there is still evidence of an appetite for further innovation around products and pricing. Mobile phone operators have responded to the downturn with sub £10-per-month deals, while new content distribution models emerged in 2008/09 such as ‘free’ music services, online catch-up TV and micro blogging. Meanwhile, telecoms operators are rolling out super- fast broadband and greater numbers of consumers are buying communications services in ‘bundles’ from single suppliers. We explore these developments in detail in the report. For the first time this year, we have also provided in this report insights into communications trends across the UK’s nations, comparing and contrasting consumption patterns, device adoption and content production in England, Northern Ireland, Scotland and Wales. We publish this report to support Ofcom’s regulatory goal to research markets constantly and to remain at the forefront of technological understanding; it also fulfils the requirements on Ofcom under section 358 of the Communications Act 2003 to publish an annual factual and statistical report. It also addresses the requirement to undertake and make public our consumer research (as set out in Sections 14 and 15 of the same Act). We appreciate your feedback on all Communications Market reports. Please email your comments to Ofcom’s Market Intelligence team on market.intelligence@ofcom.org.uk 1
  2. 2. The information set out in this report does not represent any proposal or conclusion by Ofcom in respect of the current or future definition of markets and/or the assessment of licence applications or significant market power or dominant market position or in respect of any other regulatory process for the purposes of the Communications Act 2003, the Wireless Telegraphy Act 2006, the Broadcasting Acts 1990 and 1996, the Competition Act 1998 or other relevant legislation. 2
  3. 3. Contents Introduction 1  Key Points 4  1  The market in context 11  1.1 Introduction and structure 13  1.2 Key market trends 14  1.3 Communications markets and the recession 23  1.4 Consumers embrace DVRs 39  1.5 The nations’ communications markets 54  2  Television 65  2.1 Key market developments in television 67  2.2 The television industry 81  2.3 The television viewer 119  3  Radio 147  3.1 Key market developments in radio 149  3.2 The radio industry 159  3.3 The radio listener 181  4  Telecoms 195  4.1 Key market developments in telecoms 197  4.2 The telecoms industry 221  4.3 The telecoms user 241  5  Converging Markets 261  5.1 Converging communications markets 263  5.2 Content 265  5.3 Distribution and devices 299  6  Annexes 315  Glossary 317  Table of Figures 326  3
  4. 4. Key Points Key points: the market in context Key market trends  Availability of key communications services remained largely unchanged in 2008. Of the key communications services that are tracked by Ofcom, only the availability of local loop unbundling (LLU) services increased in the year (by four percentage points, to 84% of households) (page 15).  Communications industry revenue (based on elements monitored by Ofcom) increased by 0.2% to £51.8bn in 2008, with television (in particular pay-TV subscriptions) the main driver of growth. Telecoms revenue remained flat, while radio revenues fell in 2008 (page 17).  Household spend on communications services fell again in 2008. In real terms, UK households’ average spend on communications was £93.69 a month, down £4.39 on 2007. Spend on communications services accounted for 4.63% of total monthly household outgoings, down from 4.8% a year earlier (page 17).  Consumer satisfaction with communications services increased in the year to Q1 2009, up to 89% compared to 86% in Q1 2008. Mobile telephony again scored highest out of the five communications services included in our research, with 94% of consumers either ‘satisfied’ or ‘very satisfied’ with their mobile service (page 19).  Ofcom research shows that at the end of Q1 2009, 46% of UK homes bought communications services in ‘bundles’, up by seven percentage points since Q1 2008. The majority of these bundles were either fixed voice and broadband ‘double play’ (44%) or fixed voice, broadband and multichannel TV ‘triple play’ (34%) (page 20). Communications markets and the recession  Communications spend appears relatively robust when compared to alternative claims on disposable income. Meals/nights out and holidays are the expenditure categories most likely to be cut from consumers’ disposable income; only spend on toiletries and groceries appears more secure than that on communications products (page 26).  However, consumers seem to see opportunities to save on their communications spending – for example, by bundling services or by deferring mobile handset purchases. Some consumers are also more likely now to shop around for communications services (page 26).  Advertising expenditure is generally cyclical, and this is borne out in the latest revenue data from broadcasters. Radio industry revenue contracted year on year, and while overall television revenue rose, the commercial PSBs attracted less advertising revenue this year than last (page 35).  While it is less clear that the telecoms industries have been affected by the economic downturn, mobile and broadband operators are affected by the competitive pressures of markets approaching saturation, and the increasing use of mobile phones rather than fixed-line phones is putting pressure on fixed-line operators (page 37). 4
  5. 5. Consumers’ use of digital video recorders (DVR)  More than a quarter of consumers (27%) claimed to use a DVR at the end of Q1 2009, equivalent to 7 million homes, according to Ofcom research. This rose to nearly a third of consumers (31%) in multichannel television homes. These figures are a little lower than those from operator and sales data, which suggest that nearly 9 million DVRs had been sold in the UK at the end of Q1 2009 (page 41).  Fifteen per cent of viewing across the five main PSB channels in 2008 was for recorded programmes, according to data from BARB, the television industry’s audience measurement organisation. In Sky+ homes this rose to 19%. Adults aged 16-34 are the group most likely to watch programmes recorded on a DVR; 19% of viewing among this age group was on a recorded basis in 2008, which compared to the lowest figure of 11%, for viewers aged 55 and over (page 42).  Forty-two per cent of consumers said that they watched a greater variety of programmes since owning a DVR, although a third (33%) disagreed with this. Eighty per cent of consumers believe that they watch more programmes that they enjoy because of their DVR (page 51).  DVRs are becoming increasingly advanced, offering viewers search functionality and ‘push’ video-on-demand, where programmes are downloaded to the hard disk drive, for example. Hard drives are also increasing in size. Some offer up to 250 hours of recording, up markedly from the 40 hours available on early generations of devices (page 53). The nations’ communications markets  Personal use of mobiles was more prevalent than use of fixed lines in every UK nation for the first time in 2009. Broadband was the fastest growing communications platform, with double digit take-up increases in England, Wales and Northern Ireland (page 57).  UK consumers showed a renewed interest in ‘bundling’ services during 2008/09. Forty-six per cent of homes took two or more services from the same supplier. People in England were most likely to take a bundle, but growth was fastest in Wales and Northern Ireland (page 59).  During 2008, spend per head on networked television production was highest in England during 2008 at £35.51; investment on TV hours for a nation was highest in Northern Ireland (£16.05), while expenditure on non-English language output was greatest in Wales at £24.38 (page 60).  People in Scotland watched more TV than anywhere else in 2008 (4.2 hours/day/head versus UK average of 3.8). PSB TV output was most popular with viewers in Wales (62% share of viewing) and least popular in London (57%). Levels of radio listening across the four nations were similar at around 3.2 hours per listener per day. The popularity of the BBC’s radio services varied by nation – from 46% of listener hours in Scotland to 63% in Wales (page 61). 5
  6. 6. Key points: television  Total television industry revenue grew by 1.3% to reach £11.2bn in 2008. This was largely driven by subscription revenue, which increased by 5.7% in 2008 to reach £4.32bn. Pay-TV providers increased subscriber numbers while products like multiroom and high-definition television also gained in popularity (pages 69 and 82).  Total TV net advertising revenue was £3.47bn in 2008, down 3% year on year, as the gains in multichannel revenue, up 9.3% to nearly £1.3bn, helped to offset the reductions on the mainstream channels (page 69).  Net advertising revenue for ITV1, GMTV1, Channel 4 and Five decreased 8% year on year to £2.1bn. The four main commercial PSBs undertook several cost-cutting measures as they felt the impact of the recession and the wider structural challenges facing free-to-air broadcasting (page 84).  Broadcasters’ total spend on television output passed the £5bn mark, fuelled mostly by increased investment in Sport and Film channels (driven by higher costs for rights acquisitions) and BBC One (page 88).  The five main PSB channels broadcast 33,165 hours of first-run originated programming in 2008, down by 3% on 2007 and by 5.6% (1,845 hours) since 2003. The five PSB channels also invested less in first-run originations. In 2008 prices, they spent £2.6bn in 2008, down by 2.9% year on year (page 90).  UK television channels broadcast nearly 2.5 million hours of programming in 2008. Of these, almost 1.5 million hours were broadcast by the PSB channels and key multichannel genres, of which 9% (133k hours) were first-run originations (page 89).  The five main PSB channels (BBC One, BBC Two, ITV1, Channel 4 and Five) attracted a viewing share of 60.8% in all homes during 2008, down by 2.7 percentage points year on year (page 130).  Digital television penetration in the UK reached 89.2% at the end of Q1 2009, an increase of 2.1 percentage points year on year. This meant that around 22.8 million homes received digital television on their main set at the end of March 2009 (pages 73 and 121).  Digital switchover is now well under way and Exeter in the West Country became the UK’s first ‘digital city’ in May 2009. Analogue switchover in the first region of the Scottish Borders was completed in November 2008 (page 74).  High-definition television gained traction over the past 12 months, as new HD channels launched and more platforms developed their HD propositions. By the end of the first quarter of 2009, 2.3 million homes (9%) had reception equipment capable of accessing linear or on-demand HD content. Thirty-three per cent of UK homes claimed to have HD-ready television sets at the end of 2008, according to our research (page 76).  A total of 77 television channel licences were issued by Ofcom in 2008, significantly down from the 143 issued during 2007. Overseas licences formed an increasingly large proportion of the new licences (page 79). There were 495 channels broadcasting in the UK at the end of 2008, up from 470 a year earlier. 6
  7. 7. Key points: radio  Total UK radio industry funding stood at £1.15bn in 2008, down by 2.3% on 2007. This followed a fall in commercial revenues of 3.3% to £505m and we estimate that the BBC reduced its radio spend by 1.5% to £643m (accounting for a 56% share of all radio income/spend) (page 160).  By Q1 2009, digital radio platforms attracted just over a fifth of all radio listening hours (20.1%), up from 17.8% in Q1 2008, according to RAJAR figures. The majority (63%) of digital listening came via DAB, which accounted for 12.7% of all radio listening. Digital television delivered a further 3.4% and the internet 2.2% (page 150).  Radio audience reach was down by one percentage point in 2008 on five years previously, at 89.5% of adults. Time spent listening to the radio was also down, by 5% in five years, and by 1.7% year on year. Total listening hours to all BBC Radio stations were down by 0.5% during 2008 but still up modestly (0.2%) since 2003. By contrast, all commercial radio listener hours were down both by 3.2% in the year and 11.4% over five years (page 181).  Within this overall pattern of reductions, listening to national radio stations has risen, while local radio listening hours have contracted. BBC network radio listening hours have risen by 6.4% in five years and national commercial hours are up 16.9%, although down on the past year. By comparison, local BBC station hours fell by 19.1% and local commercial by 18.3% (page 183).  The decline in radio listening has been most notable among younger listeners, with hours falling by 21% among 4-15 year olds between 2003 and 2008. The reduction in hours grew progressively lower as the age of the audience increased. Among younger adults (15-24), hours were down 12.0%; among 25-34s they were down 11.1%. Listening among older age groups was more stable; down by 1.7% among listeners aged 55+, while hours were flat among 45-54 year olds (page 183).  Cumulative sales of DAB digital radio sets passed 9 million by Q1 2009 (up from almost 7 million in Q1 2008), following sales of around 2 million in the previous 12 months. RAJAR estimates that almost a third (32%) of UK adults owned a DAB set by the end of Q1 2009, up by five percentage points on the previous year (page 151).  A third of adults (33%) had listened to the radio online, according to the RAJAR internet and audio services survey carried out in May 2009. This was up from 29% a year previously and from 24% six months before that (page 151).  In June 2009, the Government’s Digital Britain report was published, recommending the digital migration of the majority of radio services in the UK, with a proposed target of 2015. It specified an interim 2013 milestone of 50% of all radio listening to be through a digital platform, and targets for national DAB coverage to be comparable to FM and for car manufacturers to be installing DAB sets as standard (page 155).  Twenty-one new community radio licences were awarded in the six months to June 2009, covering a number of regions in England including the Midlands, the North West, the East and the South East. By July 2009, Ofcom had awarded a total of 205 community radio licences, with 141 stations already on air. Licences are still to be awarded for community stations in Greater London and areas within the M25, within the current second round of licensing (page 172). 7
  8. 8. Key points: telecoms  For the first time since Oftel started to collect market data in 1992/93, operator-reported revenues from telecoms services did not increase in 2008. Total revenues were unchanged at £39.5bn, with increasing retail revenues being offset by falling wholesale revenues (page 222).  Telecoms services accounted for 3.2% of total household expenditure in 2008, down from 3.4% in 2007. Telecoms spend fell by 5.2% in real terms over the year, the largest annual decline since spend on telecoms services began to fall in 2006 (page 242).  Nearly two-thirds (65%) of UK households had a fixed-line broadband connection in Q1 2009, up from 58% a year previously (page 247).  Mobile broadband has continued to grow, with take-up of pre-pay services contributing to over a quarter of a million new connections in May 2009 alone. Around 12% of UK households had a mobile broadband connection in Q1 2009; three-quarters of these also had a fixed-line broadband connection, indicating that for many mobile broadband is a complement to, rather than a substitute for, a fixed-line service (page 208).  Eleven per cent of households had a mobile connection but no fixed-line connection in Q1 2009 (unchanged from a year previously). However, 22% of households in socio- economic group DE are mobile-only (page 248).  Mobile use continues to grow. The number of monthly outbound minutes per mobile connection increased by 6%, to 123 minutes, while the number of text messages increased by 29% to an average of 99 messages per month from each mobile connection (page 253).  For the first time, the number of pre-pay (pay-as-you-go) mobile connections fell during 2008. This was driven by the availability of low-cost contracts, including SIM-only tariffs which accounted for nearly a quarter of new contract sales in the first five months of 2009. Thirty-two per cent of mobile contracts sold in Q1 2009 were for tariffs of less than £20 per month, compared to 23% in Q1 2008 and just 5% in Q1 2007 (page 233).  24-month mobile contracts emerged during 2008, accounting for 13% of new post-pay connections in Q1 2009, compared to 2% a year previously. At the other end of the scale, 24% of new contracts were for just one month in Q1 2009 (driven by the take-up of SIM-only tariffs), up from 10% in Q1 2008 and less than 1% in Q1 2007 (page 217).  More than 8 million people in the UK (16% of adults) accessed the internet on their mobile phone in Q1 2009, up by 42% on a year previously. This growth has in part been driven by the increasing use of smartphones, which accounted for 16% of all handset sales in Q1 2009, and the increasing use of mobile applications (page 209).  BT’s share of retail fixed voice calls to UK geographic numbers fell to under 50% for the first time in 2008. Increasing use of wholesale line rental (WLR) and local loop unbundling (LLU) services contributed to the erosion of BT’s retail share (page 227).  Overall satisfaction levels are high, with 90% or more of consumers satisfied with their fixed-voice, fixed-broadband and mobile services. However, satisfaction with the speed of fixed-line broadband connections has fallen from 90% in Q1 2006 to 81% in Q1 2009. (page 256). 8
  9. 9. Key points: converging markets  Online catch-up TV began to enter the mainstream in 2008, largely thanks to the growing popularity of the BBC iPlayer. Twenty-three per cent of households claim to watch programmes online, rising to 33% among 15-24s. But 10% of people aged 65+ reported that someone in their household watched catch-up TV online (page 265).  The BBC’s iPlayer served up 275 million online video streams (750,000 streams per day) in 2008, and a further 100 million over Virgin Media’s network. Channel 4 delivered nearly 150 million streams during the same period. All major broadcasters now have similar offerings (page 270).  A quarter of the population admitted to the unauthorised sharing of music online according to data from Entertainment Media Research, and 5% admitted to doing so regularly. However, most unauthorised sharing is done by copying physical discs – 37% have let someone else copy a CD. Younger people seem less concerned about obtaining content for free – 66% believe it is morally acceptable to do so (page 275).  Social networking is growing more slowly than previously. Facebook cemented its position as the most used site, growing by 73% since May 2008 to reach a monthly unique audience of 19 million, compared to 5 million for MySpace and 4 million for Bebo. But new services are still growing fast – Twitter now has 2.6 million unique users, up from 150,000 in May 2009 (page 289).  Social networking is also maturing - literally. Use grew fastest among 35-54s – up by eight percentage points since Q1 2008 to 35%. Among 25-34 year olds use grew by six percentage points to 46% but it actually fell slightly among 15-24s – by five percentage points to 50% (page 289).  The free ad-supported streaming service Spotify has made its mark in online music – the average user now spends over two hours per month browsing and searching for music through Spotify. This is ahead of established music applications with much larger audiences such as iTunes (just under two hours) and Windows Media Player (just under an hour) (page 282).  Older consumers are increasingly adopting digital platforms. Since 2008 take-up of mobile phones, digital TV, DAB radio and the internet grew by double digits among consumers aged 65+. Seventy-seven per cent now have digital TV, 68% have a mobile phone, 41% have the internet and 28% a DAB digital radio set (page 305).  Only a minority of people use advanced functions on their mobile phone handsets. Apart from text messaging (83%) and voicemail (56%), the only other function used by the majority of mobile phone users was taking and storing photos (52%) (page 310).  Internet advertising spend grew to reach £3.3bn in 2008. For the first time, in 2008 the internet accounted for over one in every five pounds (20%) of UK advertising spend. The internet’s share has grown by 17 percentage points since 2003, with nearly half this growth at the expense of newspapers (page 295). 9
  10. 10. The Communications Market 2009 1 1 The market in context 11
  11. 11. Contents   1.1 Introduction and structure 13  1.2 Key market trends 14  1.2.1  Introduction, structure and findings 14  1.2.2  Availability: little change as many services approach near-universal coverage 14  1.2.3  Fixed broadband take-up rose by seven percentage points to 65% of homes in 2008 16  1.2.4  Communications industry revenue grew by just 0.2% to £51.8bn 16  1.2.5  Average household spend on communications services falls 17  1.2.6  Consumers are spending growing amounts of time on the internet 18  1.2.7  Satisfaction with communications services remains high 18  1.2.8  More consumers are buying bundles 19  1.2.9  Attitudes to media consumption 20  1.3 Communications markets and the recession 23  1.3.1  Introduction, structure and key findings 23  1.3.2  Economic trends and consumer attitudes towards the downturn 24  1.3.3  Consumers’ response to the economic downturn 25  1.3.4  The recession and communications service providers 32  1.3.5  Advertising revenues fall while broadcasters implement cost control measures 34  1.3.6  Telecoms players look to longer contracts as pre-pay subscriptions fall 36  1.4 Consumers embrace DVRs 39  1.4.1  Introduction, structure and key findings 39  1.4.2  More than a quarter of homes have a DVR 40  1.4.3  DVR use varies by age, platform and channel 42  1.4.4  Films and HD channels prove popular for recording 45  1.4.5  Drama series attract more recorded than live viewing in Sky+ homes 48  1.4.6  Three-quarters of viewers claim to fast-forward most adverts 49  1.4.7  DVRs users watch more television that they enjoy 51  1.4.8  DVRs are adding greater functionality and storage 51  1.4.9  Hard disks: bigger and cheaper 52  1.5 The nations’ communications markets 54  1.5.1  Introduction, structure and findings 54  1.5.2  The availability of communications services across the UK 55  1.5.3  Device and service take-up across the UK’s nations 56  1.5.4  Communications service bundling 58  1.5.5  Production of broadcast-based content across the UK 59  1.5.6  Consumption of broadcast services in the UK’s nations 60  12
  12. 12. 1.1 Introduction and structure This section of the Communications Market Report 2009 summarises a range of communications market developments over the last twelve months. It is organised into four sections:  Key market trends (page 14) This section summarises developments in communications services availability and take-up. It then sets out industry revenue trends and household spend on communications services before concluding with consumer satisfaction metrics and consumers’ propensity to bundle services together.  Communications markets and the recession (Section 1.3, page 23) The UK moved into recession in the final quarter of 2008, and its impact is being felt by consumers and industry. In this context, we commissioned research to understand the degree to which consumers’ attitudes towards communications services are being influenced by the recession. We also explore how industry revenues have fared over the last twelve months, and the steps that companies have taken to control costs.  Consumers’ use of digital video recorders (DVR) (Section 1.4 page 39) The advent of the DVR - also known as a personal video recorder (PVR) or digital television recorder (DTR) – has offered consumers greater convenience and control over their television viewing than was available through analogue video cassette recorders (VCR). Now in more than a quarter of UK homes, consumers have embraced DVRs across a range of digital television platforms. Here we set out key metrics on the take-up and use of DVR products and identify trends in consumer attitudes towards DVR use.  The nations’ communications markets (Section 1.5, page 54) Ofcom has published four nations’ Communications Market Reports alongside this report. As national or regional issues become more prominent in communications policy development (for example, the future of public service broadcasting and the Government’s proposed universal availability of 2Mbit/s broadband), so the characteristics of service availability, take-up and consumption by nation grow in importance. In this section we provide a short summary of the findings of CMR: Nations reports1. 1 See http://www.ofcom.org.uk/research/cm/cmrnr09/ 13
  13. 13. 1.2 Key market trends 1.2.1 Introduction, structure and findings Introduction This section provides an overview of key trends in the UK communications market in the year to the first quarter of 2009. We begin by looking at service availability and consumer take-up. We then turn to industry revenue and consumer spending before concluding by examining consumption of different communications services and consumers’ satisfaction with those services. Structure and findings  The availability of most communications services has remained largely unchanged year on year – but local loop unbundling is now available to 84% of consumers, up by four percentage points year on year. Fixed broadband penetration rose by seven percentage points year on year to 65%. Section 1.2.2 (page 14).  Communications industry revenue grew by 0.2% £51.8bn. Television revenue was up in 2008 by 1.3%; telecoms revenue was flat but radio contracted by 2.3% over the year. Section 1.2.4 (page 16)  Real household monthly spend on communications fell again in 2008, by 4.5% to £93.69. Section 1.2.5 (page 17)  UK consumers spent an average of 25 minutes per day using the internet in May 2009, up from nine minutes in May 2004. Section 1.2.6 (page 18)  Satisfaction levels rose for most communications services over 2008. For broadband it was up by one percentage points to 90%; for fixed-line voice it rose by four percentage points to 92% while satisfaction with mobile services satisfaction was 94% (flat year on year). Section 1.2.7 (page 18)  The number of UK homes buying communications services as part of bundles increased in 2008. Section 1.2.8 (page 19)  Just over half of consumers (51%) claim that watching television is the media activity that they would miss most. Section 1.2.9 (page 20) 1.2.2 Availability: little change as many services approach near-universal coverage Coverage of key communications services remained largely unchanged in 2008 following marked increases in the availability of 3G mobile and local loop unbundling (LLU) during 2007. Of the key communications services that are tracked by Ofcom (Figure 1.1), only LLU availability rose during 2008. For broadband, as availability reaches near-universal levels, the focus of service providers has now shifted to the speed of the broadband connection. The industry is working on offering consumers ‘super fast’ broadband, while the Government’s Digital Britain report included the objective of delivering minimum broadband speeds of 2Mbit/s by 2012. 14
  14. 14. Key developments in availability include: • moves to increase the speed of broadband connections. Super-fast broadband was made available to some UK homes for the first time in 2008, as operators responded to demand for higher-bandwidth products: o Virgin Media deployed ‘up to’ 50Mbit/s fibre-based broadband. By July 2009, 50Mbit/s broadband was available to 12.5 million homes, up from 5 million at the end of 2008. The company is also piloting speeds of 200Mbit/s. o BT announced plans to make its super-fast broadband available to 40% of the UK, around 10 million homes, by 2012, at a cost of £1.5bn2 and covering 1.5 million homes by the summer of 2010. o Within this context, Ofcom has consulted with industry on how to promote investment and competition in super-fast broadband. o The Government’s Digital Britain report, published in June 2009, announced proposals to add 50p per month to the cost of fixed telephone line rental to create a fund for super-fast broadband. If implemented, the scheme would aim to see super-fast broadband made available to 90% of UK homes by 2017. • Local loop unbundling (LLU) availability increased by four percentage points to reach 84% of UK households. LLU allows competing telecoms providers to install their own equipment in telephone exchanges, connect consumers to their own network and then offer services such as fixed telephony, DSL broadband and IPTV to end-users. Figure 1.1 Digital communications service availability, 2007 and 2008 UK-wide Platform 2008 2007 Change England Scotland Wales N Ireland Fixed line 100% 100% 0% 100% 100% 100% 100% 2G mobile 1 98% - - 99% 89% 92% 92% 3G mobile2 87% - - 91% 67% 67% 43% DSL 3 99.6% 99.6% 0.0% - - - - Cable broadband4 49% 49% 0% 53% 38% 24% 30% LLU5 84% 80% 4% 87% 70% 76% 71% IPTV6 39% 39% 0% - - - - Digital satellite TV 98% 98% 0% - - - - Digital terrestrial TV 7 73% 73% 0% 73% 82% 57% 58% DAB digital radio8 90% 90% 0% n/a n/a n/a n/a Sources: Ofcom and: 1. Proportion of population living in postal districts where at least one operator reports at least 90% 2G area coverage. Sourced from GSM Association / Europa Technologies 2. Proportion of population living in postal districts where at least one operator reports at least 90% 3G area coverage. Sourced from GSM Association / Europa Technologies 3. Proportion of premises able to receive DSL services based on data reported by BT 4. Proportion of households passed by Virgin Media’s broadband-enabled network 5. Proportion of households connected to an LLU-enabled exchange 6. IPTV availability figure calculated on the assumption that Tiscali TV is now available in a number of areas including London, Stevenage, Birmingham, Newcastle and Edinburgh 7. Availability of services from all six digital multiplexes 2 http://www.btplc.com/news/Articles/ShowArticle.cfm?ArticleID=EFD7B1FA-52ED-45BB-B530- 734FAC577E94 15
  15. 15. 8. DAB digital radio coverage figure based on a BBC/Digital One estimate. Both the BBC and Digital One built new transmission masts during 2006/07 1.2.3 Fixed broadband take-up rose by seven percentage points to 65% of homes in 2008 Broadband take-up continued to grow in 2008. Ofcom research found that 65% of UK households had a fixed broadband connection at the end of Q1 2009, an increase of seven percentage points year on year. The total number of UK fixed broadband connections increased by 10.7% to 17.3 million during 2008, up by 1.7 million on 2007. The number of LLU DSL broadband connections increased by 47.6% to reach 5.5 million at the end of 2008. Take-up of mobile broadband also grew substantially over the year. Around 3 million homes had a mobile broadband connection (equivalent to 12% of the population) by the end of Q1 2009 and according to point-of-sale data from GfK there were over 250,000 mobile broadband sales in May 2009 alone (compared to 139,000 in May 2008). By contrast, digital television penetration on main sets reached 89.2% (22.8 million households) in Q1 2009, up by 2.1% year on year – a comparatively small rate of growth compared to earlier years. Take-up was as high as 95% of individuals in Derby and Swansea, but as low as 71% in Glasgow and Derry/Londonderry. Increasing numbers of consumers are acquiring digital video recorders (DVR), which are now installed in 27% of UK homes. Moreover, the number of homes with access to high- definition TV channels more than doubled in the year to Q1 2009 to reach 1.9 million, up from 829,000 a year earlier. Figure 1.2 Digital technology adoption, Q1 2008 and Q1 2009 Fixed line Mobile 87% 89% 100 Fixed broadband 65% Proportion of individuals Digital TV 75 89% 50 Mobile DVR (%) broadband Games 12% 27% console 25 Blu-ray / 47% HDTV HD DVD Q1 2008 channels 11% DAB digital Q1 2009 0 7% 3G radio 32% 22% Innovators Early Early Late Late adopters majority majority adopters Source: Ofcom research and operator data Notes: All figures relate to Q1 2009; all figures are measured as a proportion of individuals except for 3G, which represents the proportion of mobile subscribers and DTV, which represents the proportion of homes with a digital television reception device on the main set. 1.2.4 Communications industry revenue grew by just 0.2% to £51.8bn The impact of the economic downturn was felt by companies across the communications sectors in 2008. Overall revenues climbed by just 0.2% year on year to a little under £52bn. A 2.3% fall in radio revenue of £0.1bn to £1.1bn was offset by rising TV revenue, which grew by 1.3% to £11.2bn over the same period. Increased television revenue was largely driven 16
  16. 16. by subscriptions, up 5.7% in 2008 to reach £4.3bn, while net advertising revenue decreased by 2.9% to £3.5bn.Telecoms revenue was flat in 2008 at £39.5bn (Figure 1.3). Figure 1.3 Communications industry revenue 60 1 year 5 year 49.9 51.7 51.8 growth CAGR 48.0 49.0 1.1 44.7 1.1 1.2 1.2 1.2 1.1 10.5 10.6 11.1 11.2 0.2% 3.0% 40 10.0 Total Revenue (£bn) 9.2 Radio -2.3% 0.4% 20 36.8 37.4 38.2 39.5 39.5 34.4 TV 1.3% 4.1% 0 Telecoms 0.0% 2.8% 2003 2004 2005 2006 2007 2008 Source: Ofcom/operators Note: Includes licence fee allocation for radio and TV 1.2.5 Average household spend on communications services falls Over the year, consumers once again found their monthly household spend on communications services falling. In real terms, UK household average spend was £93.69 a month, down 4.7% or £4.39 on 2007, marking the largest annual fall since Ofcom began tracking the market (Figure 1.4). All communications services saw decreases in monthly household spend, but spend on internet subscriptions fell furthest in proportional terms, down by 6.2% to £10.71, despite increasing take-up. Spend on fixed-line voice decreased by 5.3% to £22.263. Monthly spend on communications accounted for 4.63% of total household spend, down from 4.79% in 2007 but up from 4.49% in 2003. Figure 1.4 Average monthly household spend on communications services 150 6% Total comms 4.72% 4.75% 4.72% 4.79% 4.63% £ per month (2008 prices) 4.49% £101.52 Radio As % of total spend £95.80 £100.54 £98.85 £98.08 100 2.35 2.34 £93.69 4% 2.37 2.20 2.60 2.44 25.71 26.35 26.97 26.57 26.64 TV 26.24 7.25 9.22 10.69 11.53 11.37 10.71 Internet & 50 29.13 33.51 34.88 2% broadband 33.66 33.98 32.04 Mobile voice & text 31.34 29.11 26.64 24.90 23.49 22.26 0 0% As a %age of total 2003 2004 2005 2006 2007 2008 household spend Source: Ofcom/operators 3 It should be noted that in order to reflect these changes in household spend in real terms they have been inflation-adjusted, using the consumer price index (CPI) which increased 3.6% during 2008. The number of UK households also increased by 1.2% during 2008. This explains why average spend per household fell in 2008 even while there was a small increase in overall industry revenues. 17
  17. 17. 1.2.6 Consumers are spending growing amounts of time on the internet The shifting pattern of communications service consumption which we have highlighted in previous years continued into 2008. Figure 1.5 shows the amount of time consumers spent per day using communications services in 2003 and 2008. Radio listening experienced the steepest decline in usage, down by 17 minutes year on year to 172 minutes in 2008; TV television viewing levels actually rose modestly over by one minute to 225 minutes per day. Mobile telephony and home internet use (including web and applications) both experienced the largest increases in average daily use (15% and 22% respectively) Figure 1.5 Average time per day spent using communications services 0.1% -1.9% 21.5% -3.4% 15.2% 5 year 250 CAGR 224 225 day Minutes per person per da 200 189 172 150 2003 100 2008 50 25 9 15 13 6 11 0 Television Radio Internet Fixed Mobile Source: Ofcom / BARB / RAJAR / Neilsen Netratings (home use only) Note: Daily figures were calculated from monthly data on the assumption that there are 30.4 days in the average month; the exception was for internet consumption where the quoted figures relate to May 2004 and May 2009, and 31 days were used; the internet consumption figures include the use of online applications such as streaming media and only include use at home; mobile telephony figures are estimated assuming that the average time taken to send and receive a text message is 35 seconds. 1.2.7 Satisfaction with communications services remains high Consumer satisfaction with communications services remained high across all five communications services in 2008: • Mobile telephony scored highest out of the five communications services, with 94% of consumers either ‘satisfied’ or ‘very satisfied’ with their service. • Digital television experienced the most marked decline in satisfaction, down by five percentage points to 85% of consumers being either ‘satisfied’ or ‘very satisfied’. • Mobile broadband – included in our research for the first time – attracted the lowest satisfaction rating of all the communications services that we surveyed (83%). 18
  18. 18. Figure 1.6 Overall satisfaction with communications services Source: Ofcom research, Q1 2009 Note: Shows the proportion of users with each service, includes only those who expressed an opinion. 1.2.8 More consumers are buying bundles A wide range of suppliers now offer consumers services in ‘bundles’, in which two or more products are supplied by the same provider. This often offers the advantage of a price discount and the convenience of receiving a single bill for several services. Figure 1.7 shows the bundled services available from major suppliers in the UK. Figure 1.7 Bundled service offers from major suppliers Source: Pure Pricing, June 2009 Note: Highlighted box denotes that the combination of services requires the purchase of additional services. Ofcom research shows that the number of households taking bundled services rose by seven percentage points in the 12 months to Q1 2009 to reach 46%. The great majority of these bundles were either fixed voice and broadband ‘double play’ (44%) or fixed voice, 19
  19. 19. broadband and multichannel TV ‘triple play’ (34%). Take-up of bundles was as high as 68% of individuals in Bristol, to 62% in Newport, 56% in Edinburgh and 46% in Belfast. Figure 1.8 Bundled services by consumer, by type 29% 31% 29% 35% 40% 39% 46% Source: Ofcom research, Q1 2009 Note: A bundled service is defined as two or more services taken from a single provider, with or without a price discount. 1.2.9 Attitudes to media consumption Just over half of consumers (51%) claim that watching television is the media activity that they would miss most, a similar figure to 2007. The number of people citing most other media activities has declined slightly since 2007 or stayed the same. One notable exception was use of the internet, which rose by three percentage points to 15%, a statistically significant change, to become the second media activity that would be missed the most. Mobile phone use fell four percentage points, also a statistically significant change, and is now the third most-missed media activity. Listening to the radio, and listening to music on both traditional and digital platforms among 16-24s has declined dramatically between 2005 and 2009 as the most-missed media activity. Listening to music on a hi-fi/CD or tape player has fallen from 18% in 2005 to 0% in 2009 (a statistically significant change). This preference change has not been substituted by music listening on a digital device, but instead by television watching, which is now the most missed-media activity for this demographic. Listening to music on a hi-fi/CD or tape player has also declined as the most-missed media activity among 25-34s. This age group also express a statistically significant increase in missing console and computer gaming the most. 20
  20. 20. Figure 1.9 Which media activity would consumers miss the most 100% Watch videos/DVDs 2% 1% 2% 2% 1% 3% 1% 3% 3% 1% 2% 1% 2% 2% 6% 3% 3% 5% 2% 7% 4% 3% 4% 3% 3% 1% 1% 4% 0% 6% 5% 13% 5% 4% 6% 2% Listen to a portable 0% 14% 2% 2% music device/MP3 8% 2% 0% 4% 3% 8% 18% player 80% 6% 4% 2% 24% Play 9% 7% console/computer 13% 1% 18% 14% 12% games 7% 33% 15% 14% Listen to music on a 60% 12% hi-fi/CD or tape 10% 14% player 20% 19% 8% 28% 11% Read newspapers/ magazines 40% 21% Listen to the radio 11% 52% 51% 44% 47% Use a mobile phone 20% 39% 41% 40% 28% 22% Use the internet via computer/laptop 0% Watch television 2005 2007 2009 2005 2007 2009 2005 2007 2009 All adults All adults All adults 16-24 16-24 16-24 25-34 25-34 25-34 A2 – Which one of these would you miss doing the most? Base: All adults aged 16+ (3244 in 2005, 2905 in 2007, 812 in 2009), adults aged 16-24 (530 in 2005, 413 in 2007, 106 in 2009), adults aged 25-34 (604 in 2005, 473 in 2007, 126 in 2009). Circles show statistically significant change between 2007 and 2009. Source: Ofcom research, fieldwork carried out by Saville Rossiter-Base in April to May 2009 Consumers’ age affects the types of activities that they use the internet for. Our research looked at a selection of convergent activities that people can use the internet for (Figure 1.9). It found that nearly all the activities were most popular among consumers aged 15-24, however, listening to the radio online was only marginally more popular among 15-24s (21%) than among those with internet at home generally (17%). The only group in which more than half engaged in any of the mentioned activities (online gaming, downloading content files and watching video) was 15-24 year olds. Overall, playing games online and watching TV programmes online both rose over the past year, by an average of three percentage points. Growth rates for both online viewing and downloading content were more mixed, although both rose strongly among the 45-64 age group. But some online activities became less popular in 2009. There was less reported content downloading among younger age groups, and internet radio listening fell among all age groups to reach an average of just 17% of all consumers, down three percentage points year on year. 21
  21. 21. Figure 1.10 Proportion of households using the internet for listed activities % of households who use the internet for the following activities Increase in activities since Q1 2008 (percentage points) 3 3 4 2 -2 -1 -8 -5 4 0 3 4 3 3 0 -3 -3 -5 -1 -1 2 0 1 4 -4 1 9 1 2 -3 60% 53% 51% 51% 50% 42% 42% 38% 39% 40% 35% 31% 30% 31% 32% 31% 30% 25% 19% 19% 21% 19% 17% 17% 17% 18% 20% 15% 16% 13% 9% 10% 10% 7% 7% 5% 0% Playing games Downloading music Watching TV Listening to the Watching video Uploading/ adding online/interactively files, movies or programmes radio clips/webcasts content video clips All 15-24 25-44 45-64 65+ Base: All adults who have the internet at home (n= 3858) Source: Ofcom research, Q1 2009 22
  22. 22. 1.3 Communications markets and the recession 1.3.1 Introduction, structure and key findings Introduction Since the last Communications Market Report was published in August 2008, the UK economy has moved into recession4.The effects of the economic downturn have been felt by a range of UK’s communications industry operators – particularly in the free-to-view broadcasting sector, as advertisers have trimmed their spend or while others have moved resources into the internet. This is reflected in the annual operator data that Ofcom collects from broadcasters. This section explores the impact that the downturn is having, both on consumers and on communications market operators. Structure  Section 1.3.2 (page 24) sets out the UK’s macro-economic trends during 2008/09, including quarterly GDP growth, Bank of England base rates and levels of unemployment. It also examines consumer attitudes towards the recession.  Section 1.3.3 (page 25) details the findings of an omnibus survey we commissioned into how consumers’ attitudes towards communications services are being influenced by the economic downturn; and  Section 1.3.4 (page 32) concludes by exploring how industry revenues have fared over the last twelve months, and the steps that operators have taken to control costs. Findings The key findings of this section include:  There is a wide spectrum of attitudes towards the recession: many people appear to be unconcerned by its implications for them personally, but an equal number are worried about its impact (page 25).  Communications spend appears relatively robust when compared to alternative claims on disposable income. Meals/nights out and holidays are the expenditure categories most likely to be cut from consumers’ disposable income; only spend on toiletries and groceries appears more secure than that on communications products (page 26).  Consumers see opportunities to save money… people seem to see opportunities to save on their communications spending – for example, by bundling services (page 28) or by deferring mobile handset purchases (page 29). There is also evidence of polarisation in the types of mobile contract customer – with a growing proportion opting for month-long SIM-only contracts (page 37).  …and some are more likely now to shop around for communications services. Some consumers are more conscious of their communications spending now than they were a year ago (page 30); some think that providers offer better deals now 4 http://www.statistics.gov.uk/elmr/02_09/downloads/ELMR_Feb09.pdf 23
  23. 23. (page 31); and the recession is motivating some to shop around more for the best deal on communications services (page 32).  Declining advertising revenue has had an impact on the broadcasting industries. Advertising expenditure is known to be cyclical, and this is borne out in the latest revenue data from broadcasters. Radio industry revenue contracted year on year, and while overall television advertising revenue rose, the commercial PSBs attracted less advertising revenue this year than last (page 34).  Fixed-mobile substitution continues to have the greatest bearing on telecoms industry revenue. While it is less clear that the telecoms industries have been affected by the economic downturn, mobile and broadband operators are affected by the competitive pressures of markets approaching saturation, and the increasing use of mobile phones rather than fixed-line phones is putting pressure on fixed-line operators (page 34). 1.3.2 Economic trends and consumer attitudes towards the downturn In the last 12 months the UK economy has moved into recession. GDP declined in Q2 2008 and the economy has continued to contract since then. Concurrently, Bank of England base rates have fallen, from an average of 5.4% in the first quarter of 2008 to an average of 1.1% in Q1 2009, and to an all-time low of 0.5% on 5th March 2009. At the same time, unemployment rose by nearly 40% from 1.6 million in Q1 2008 to 2.2 million in Q1 2009 (Figure 1.11). Figure 1.11 UK GDP quarterly growth, Bank of England base rates and unemployment Quarter-on-quarter GDP growth (%) 0.8% -0.1% -0.7% -1.8% -2.4% 2.5m 5.4% 6% 5.0% 2.2m 5.0% 2.0m 5% 2m 1.8m Unemployment 1.6m 1.7m 4% 1.5m 3% 3.4% 1m 2% Quarterly average base rates 0.5m 1% 1.1% 0m 0% Q1 2008 Q2 2008 Q3 2008 Q4 2008 Q1 2009 Source: Office for National Statistics and The Bank of England Our research suggests that consumer attitudes towards the downturn are evenly distributed between those who have concerns about its impact on them personally, and those who have few personal worries. A range of factors may explain why so many people appear unconcerned – but historically low interest rates may have resulted in those in employment who are also owner-occupiers discovering that they are better off now than they were a year ago. Thirteen per cent of people claimed that they were ‘extremely’ worried about the recession, while a fifth claimed that they were ‘not at all’ worried. In between these extremes 40% rated their attitude to the recession as a ‘4’ (where 5 represented ‘extremely worried’) while 42% ranked it as a ‘2’ or ‘3’ (where 1 represented ‘not at all worried’). 24
  24. 24. Figure 1.12 Consumer attitudes towards the recession On a scale of 1 to 5, where 5 is ‘extremely worried’ and 1 is ‘not at all worried’, how worried are you about being personally affected by the recession? 3% (Don't know) 13% - extremely 20% - not at all worried worried 5 - extremely 4 3 16% (2) 2 40% (4) 1 - not at all worried Don't know 32% (3) Source: Ofcom-commissioned research Base: All respondents (n=2321) 1.3.3 Consumers’ response to the economic downturn Spending on communications services appears relatively robust in the downturn Consumers remain attached to their communications services, even in the face of more challenging economic circumstances. When selecting three products or services that they would cut first from their household budget, communications services were among the least likely to be chosen. Less than a fifth of consumers selected their mobile phone in their top three; that proportion fell to 16% for pay-TV, 10% for broadband and 10% for home phone calls. Only spending on groceries and toiletries/cosmetics were less popular responses. This suggests that subscriber-based income sources, on which the mobile operators, fixed- line operators and pay-TV platform operators rely, may, for the moment at least, be well- placed to withstand the current downturn. 25
  25. 25. Figure 1.13 Items where consumers are most likely to cut back their spending Items mentioned as first, second or third choice (%) Night/meals out 47% Holidays/weekends away 41% New furniture or home improvements 41% Health club membership or sports 32% Music, books, DVDs 29% Clothing or footwear 25% Newspapers and magazines 20% Spend on mobile phone 19% Television subscriptions 16% Broadband subscription 10% Home telephone calls 10% Household groceries 6% Personal care, toiletries, cosmetics 3% 0% 10% 20% 30% 40% 50% Source: Ofcom-commissioned research Base: Those that have a landline, mobile phone, pay television and broadband (n=862) Question: If you were forced to cut back on spending, which of the following items would you be most likely to spend less on? When forced to prioritise among communications services, consumers who had all four were most likely to cut back spending on their mobile phone; 43% of people in our survey chose their mobile, followed by spend on TV subscriptions (28%) then home phone calls (18%). Broadband was mentioned least frequently (12%). The identification of the mobile phone as first choice does not necessarily imply that it is the service consumers would be most happy to do without – it may be connected with the perception that their mobile service is the one where the scope for reduced spending is greatest (e.g. by switching to a SIM-only or pay-as-you-go tariff). 26
  26. 26. Figure 1.14 The communications service where consumers would be most likely to cut spend Proportion of individuals selecting each communications service (%) 100% 12% 11% 12% 14% 22% Broadband 80% 18% 18% 19% 14% subscription 19% Home telephone 60% 28% calls 28% 30% 31% Television 25% 40% subscription Spend on mobile 43% 43% phone 20% 38% 41% 33% 0% UK England Scotland Wales N Ireland* Source: Ofcom-commissioned research Base: Those with all four communications services (n= 862 for UK, n= 632 for England, n=84 for Scotland ; n=83 for Wales and n=63 for Northern Ireland).*Note small base size for Northern Ireland; results should be treated as indicative only. Question: Which ONE of the following would you be most likely to cut back spending on? Communications service bundles looking more attractive to some consumers Our research also examined changes in consumers’ attitudes towards three key decisions connected with their use of communications services:  whether to take communications services in a bundle;  whether to keep their existing mobile handset (rather than trading up); and  whether to keep (or subscribe to) pay-TV, as an alternative to going out. The research findings suggest that discounted bundles might take on added significance for some consumers in an economic downturn. Nearly half of people (47%) agreed that they were more likely now than 12 months ago to consider purchasing communications services in a bundle; only a quarter (26%) disagreed. The margin between those agreeing and disagreeing was more pronounced among those who took all four communications services; two-thirds said they would be more likely to take discounted bundles. There was also a greater tendency to agree with this statement among those who were worried about the recession. That said, there was also heightened interest in discounted bundles among those who were not worried about the recession, so the downturn might be just one of a number of factors motivating consumers to take bundles. 27
  27. 27. Figure 1.15 Consumers’ agreement/disagreement that they were more likely, in the context of a recession, to take communications services in bundles Proportion of respondents agreeing or disagreeing (%) Agree Disagree 80% 63 60% 55 47 44 40% 30 26 24 18 20% 0% Total sample Those with all four services Worried about the recession Not worried about the recession Source: Ofcom-commissioned research Base: Total sample (n = 2321), those with all 4 services (862), worried about being personally affected by recession (689), not worried about being personally affected by recession (841) Question: I am now going to read out a number of statements other people have made about how the recession has changed their spend on TV, broadband, mobile and home phone services. For each tell me how much you agree or disagree. Mobile handset upgrades are vulnerable to spending cuts Seven in ten people agreed that they would be more likely now than 12 months ago to defer upgrading their mobile handset. Those on pay-as-you-go tariffs were slightly more likely (72%) to put off purchasing a new handset than those on pay-monthly contracts (67%). Since the majority of mobile phone contracts are for 18 months or longer, it is possible that some of those in the sample would have no choice but to keep their current handset. Moreover, with most mobile users now having camera phones with internet browsing capabilities, it is possible that consumers may see less reason to change to a new model now than they would have done a year ago. 28
  28. 28. Figure 1.16 Consumers’ propensity to renew their handset now, compared to 12 months ago Proportion of respondents agreeing/disagreeing (%) Agree Disagree 80% 72 70 67 60% 40% 15 17 20% 14 0% All those with a mobile Those with a monthly contract Those on a pay-as-you-go tariff Source: Ofcom-commissioned research. Base: those with mobile (1970), those on monthly contracts (840), those on PAYG (1360). Question: I’m more likely to put off purchasing a new mobile phone and will continue to use my existing handset. These findings appear to be supported by the latest evidence on mobile handset sales. Sales in Q4 2008 and Q1 2009 were down on the corresponding quarters a year ago (9.5 versus 9.1 and 7.4 versus 7.6), although sales in these two quarters were still higher than they were two years ago. But there are complex market dynamics at play – for example, the handset market has been boosted by the popularity of smart phones such as the Apple iPhone. Figure 1.17 UK sales of mobile handsets   10 Handset sales (millions 8 6 8.8 9.5 9.1 4 8.6 7.9 6.6 6.9 7.6 7.6 7.4 6.4 6.3 6.5 6.1 6.3 2 4.4 4.2 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 2005 2006 2007 2008 2009 Source: GfK Retail and Technology Ltd. Based on factual point-of-sale information and representative of only general market statistics. All other comments, opinions and references made are not those of GfK. Notes: (1) England, Scotland and Wales only (excludes Northern Ireland); (2) based on GfK’s coverage of 94% of the market - data have been extrapolated to represent the whole of the UK; (3) only represents sales through consumer channels (i.e. most business connections are excluded). Our research also explored consumers’ views on pay television – specifically that it may grow in importance during the recession as an alternative to nights out. Few of those who currently had only free TV services said that they were more inclined to take pay-TV now than they were a year ago. Even among those with basic-tier pay-TV, there were more people who disagreed than who agreed. But among those with premium-tier TV, a higher proportion of people agreed that they would be more likely to maintain their subscription than they would have been 12 months ago. 29
  29. 29. Figure 1.18 Increased likelihood of consumers keeping/taking out a pay-TV subscription now versus 12 months ago Proportion of respondents agreeing/disagreeing (%) Agree Disagree 60% 52 50% 37 38 39 40% 36 35 34 30% 20% 15 10% 0% Those without pay TV Total pay TV Those with pay TV - basic Those with pay TV - channels premium channels Source: Ofcom research Base: Those with pay TV (1188), those with premium channels (678), those with basic channels (547), those without pay-TV n = 1133. Question: I’m more likely to keep or take out a pay- TV subscription because I’m going out less often and can make better use of it Heightened cost consciousness among some, prompting people to shop around Despite the apparent robustness of communications spending in the economic downturn, consumers are more attuned to the cost of their communications services now than they were 12 months ago. Nearly four in ten (37%) agreed that they were more conscious of mobile spend; for fixed calls this figure fell to 27%, and to 25% for pay-TV. Just 15% believed that they were more conscious of their spending on broadband. Figure 1.19 Proportion of consumers becoming more conscious over the last 12 months of their spending on a variety of communications services Proportion of respondents agreeing/disagreeing (%) 40% 37 30% 27 23 20% 15 10% 0% Mobile Home telephone calls TV subscription Broadband subscription Source: Ofcom research Base: Those with each service, mobile (1970), home landline (1901), Pay-TV (1188), Broadband (1398). Question: In the last 12 months, have you become more conscious about your spend on any of the following services? 30
  30. 30. There was also recognition among some consumers that some communications service providers are offering better deals now than they were a year ago – but that view did not extend to all services. Around a quarter of our sample agreed with this statement for both mobile and broadband providers (26% and 24% respectively). That figure fell substantially to just 13% for fixed telephony and to 8% for pay-TV services. A quarter of consumers did not recognise any communications services provider as offering better deals now than a year ago. Figure 1.20 Proportion of consumers agreeing that providers offer better deals now than a year ago Proportion of respondents agreeing/disagreeing (%) 30% 26 24 25 25% 20% 15% 13 10% 8 5% 0% Mobile providers Broadband providers Home telephone Pay TV providers None of them providers Source: Ofcom research Base: Total sample 2321 Question: Which of the following providers, if any, do you think are offering better deals than they were 12 months ago? The combination of the downturn and consumers’ concern to secure value for money from their communications services appears to extend most to mobile telephony products. Nearly one-third of people (29%) said they would be more inclined to shop around for their mobile phone services now than a year ago. They were least likely to say the same about their pay television service (11%). But nearly four in ten people said that they are no more likely now to shop around for any communications service product than they were 12 months ago. Across the UK nations, consumers’ tendency to claim they would shop around was highest in Scotland for mobile and broadband and in Northern Ireland for home telephone providers. 31
  31. 31. Figure 1.21 Consumers who are more likely to shop around for their communications service now than a year ago Proportion of respondents agreeing/disagreeing (%) 40% 38 35% 29 30% 25% 19 20% 14 15% 11 10% 5% 0% No services Mobile phone Broadband Home telephone Pay television Source: Ofcom research Base: Total sample 2321 Question: Which of the following services, if any, are you more likely to shop around for than you were 12 months ago? 1.3.4 The recession and communications service providers The media and telecoms sectors have both underperformed the FTSE 100 over the past year, in a period where the FTSE 100 itself was on a broadly downward trend until the end of 2008, with some signs of stabilisation since then. Over this period the FTSE fell by 20%, prompted by a range of company closures including the demise of Lehman Brothers in September 2008. Until December 2008, both the telecoms and media market indices fell concurrently, although investors marked down telecoms more severely than they did the media sector. Since then, the value of telecoms equities has continued to fall – with the index losing around 40% of its value by the end of June 2008 (while the FTSE 100 lost 20%) But the media index recovered ground in 2009, and was valued at 85% of its value in June 2008. 32
  32. 32. Figure 1.22 Media and telecoms share performance against FTSE 100 120 100 Media FTSE 100 80 Telecoms 60 40 Jul 08 Oct 08 Jan 09 Apr 09 Jun 09 Source: Yahoo! Finance UK & Ireland Subscriber-based revenues stable, but advertising suffers Revenue trends across the TV, telecoms and radio sectors are illustrated in Figure 1.23. Communications market revenue (as reported by operators to Ofcom and as estimated by Ofcom) reached £43bn in 2008, up by 0.5% in a year but well behind the five-year annualised average growth rate of 3.7%, and last year’s growth of 4.0%. The extent to which income has risen year on year varied substantially by sector, and by the components of revenue within each sector:  TV was the fastest-growing sector by revenue in 2008, up by 1.3% (although less than the 4.1% annualised average rate of growth).  The telecoms sector expanded, by revenue, by 0.4% year on year, considerably below the five-year growth rate (3.7%).  The radio industry revenue contracted by 2.5% year on year, compared to a five-year average growth rate of 0.4% per annum. Figure 1.23 Revenue trends in the TV, telecoms and radio sectors 1 year 5yr CAGR Total £36.1bn £39.1bn £40.6bn £41.5bn £43.1bn £43.3bn 0.5% 3.7% 40 £29.7bn £30.9bn £31.0bn £28.0bn £29.0bn 30 £25.8bn 0.4% 3.7% Telecoms 20 1.3% 4.1% TV £10.0bn £10.5bn £10.6bn £11.1bn £11.2bn £9.2bn 10 -2.5% 0.4% Radio £1.1bn £1.2bn £1.2bn £1.1bn £1.2bn £1.1bn 0 2003 2004 2005 2006 2007 2008 Source: Operators and Ofcom calculations 33
  33. 33. In the telecoms sector, the increasing use of mobile phones rather than fixed-line phones continued to have a significant bearing on revenue trends during 2008. The 0.4% (£117m) year-on-year increase was fuelled by substantial growth in mobile voice and data revenue (£185m and £112m respectively), offset somewhat by ongoing reductions in fixed voice revenue (-£266m). Mobile messaging and corporate data revenues rose by an additional £83m. By contrast, the TV and radio sectors in 2008 found that cyclical pressures on advertising revenue brought to a halt the revenue growth that has characterised both industries in recent years (although growth in the radio industry had been relatively modest). The TV industry expanded by 1.3% (£145m) year on year, fuelled principally by growing subscriber revenue. Advertising revenue fell by £105m, while we estimate that licence fee income allocated to television services contracted by an additional £31m. In radio, sector revenue actually fell by 2.5% (-£29m) in 2008. As with television, the reduction was driven both by falling advertising revenue and by a reduction in the proportion of the total licence fee that is spent on radio services. However, this was not offset by any substantial alternative revenue source such as subscriptions (although sponsorship revenue did rise). Figure 1.24 Proportional changes in sector revenues, 2007 - 2008 Telecoms Television Radio 2008 revenue £31.0bn £11.2bn £1.1bn Change YOY +£117m +£145 -£27m Net change (%) 0.4% 1.3% -2.3% 3 Net change: 1.3% Drivers of the total change in sector 0.3 Other revenue (percentage points) 2 Net change: 0.4% 1 0.3 Other 2.2 Subscriptions 0.4 Mobile data Net change: -2.3% 0.6 Mobile voice 0.6 Sponsorship 0 -0.9 Fixed voice -1.0 Advertising Advertising -1 -0.3 Licence fee -2.0 -2 -0.9 Licence fee -3 Source: Operators and Ofcom calculations Note: Licence fee allocated to TV and radio fell between 2007 and 2008, based on figures reported in the BBC’s Annual Reports & Account; this came alongside a nominal rise in the cost of a licence fee. 1.3.5 Advertising revenues fall while broadcasters implement cost control measures Figure 1.25 shows how the contraction in television advertising revenue was absorbed by the public service broadcasters (PSBs). The reduction was largest for ITV1/STV/UTV and for Channel 4, where revenues fell by 8.2% and 8.4% respectively during 2008. Five’s advertising revenue fell by 5.4% while GMTV’s rose by 1.3%. Multichannel revenue, by 34
  34. 34. contrast, rose by 6.6% over the period, reflecting the growing popularity of digital television platforms and the greater channel choice they offer. Figure 1.25 Net advertising revenues among television broadcasters £3,462m £3,576m £3,471m -2.9% 3,600 £54m £54m £287m £55m 3,200 £286m £272m £680m 1.3% GMTV1 2,800 £667m £623m Industry revenue (£m) 2,400 -5.4% Five 2,000 £1365m £1253m £1419m -8.4% Channel 4 1,600 1,200 -8.2% ITV1 800 £1189m £1267m 6.6% Multi-channels 400 £1036m 0 2006 2007 2008 Source: Ofcom/Broadcasters Note: Totals may not equal the sum of the components due to rounding. The drivers of broadcasters’ cost control measures are complex and can include cyclical factors such as an advertising downturn. But structural influences such as audience fragmentation and new editorial strategies can also have a bearing. The UK’s biggest commercial broadcasters announced a range of cost-control initiatives during 2008/09, involving job losses, asset disposals and reductions in programming budgets ITV said it would cut 600 jobs in March 2009, on top of 1,000 it announced in early 2008; Channel 4 headcount’s was reduced by more than a third to around 700, while commercial broadcaster Five announced that up to 87 jobs would be lost from the company’s 354-strong workforce. The BBC, while funded through the licence fee, also moved to cuts costs (see TV section). While the multichannel sector’s claim on advertising revenue rose year on year, it concealed an unequal distribution of revenue growth between the PSB’s portfolio channels and other television channels. Of the £78m additional advertising revenue generated by the multichannels in 2008, £77m accrued to the PSBs’ portfolio services. For the commercial PSB groups, therefore, the £183m reduction in NAR on the main channels was offset by rising NAR on their portfolio services (Figure 1.26). Concurrent with a relatively subdued year for the non-PSB multichannel sector, some channel groups took steps to control costs. A number of channels closed during 2008/09, while the major pay-TV platforms announced job cuts. The biggest casualty, in June 2009, was the UK business of Setanta Sports, which closed its subscription sports channels. 35

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