Communications Revenue Shrinks as Convergence Expands in UK

Increased convergence of communications services and technologies in the UK is changing the shape of the communications sector, in particular industry revenues – for TV, radio, and telecommunications and broadband – according to the 2007 edition of Ofcom’s annual “Communications Market Report.”

Among the myriad findings of the Ofcom report:

Television

• UK television advertising revenue in 2006 fell 2.2% from the previous year to £3.5 billion, the first fall since 2002.
• The decline in advertising revenues coincides with greater availability and use of television-style content online and the growth of digital video recorders (DVRs) that allow users to skip advertisements, putting even greater pressure on advertising revenues. The report found that up to 78% of DVR owners regularly used them to skip through ads.
• Declining advertising revenue is, however, increasingly being supplemented by alternative sources of income. In 2006 subscription revenues increased to £4 billion (approximately £350 per subscription), up from £3.3 billion in 2005.
• Similarly, revenues from interactive services, such as quiz television channels and participative voting in programs, increased 18.3% during 2006 to £123m, although this new source of income may be affected in the future as broadcasters review their approach to interactive TV.
• While television advertising overall is declining, revenues for digital-only free-to-air channels, such as ITV2, More4 and Five Life, are rising and for the first time broke though the £1 billion mark in 2006 – a 21% increase over 2005.
• Revenue for the three commercial terrestrial channels – ITV1, Channel 4 and Channel 5 – stood at £2.4 billion in 2006, 9.6% lower than in 2005.
• As television advertising revenue declines, online advertising spending continues to surge, up 47% during 2006 and just breaking the £2 billion mark.
• Internet advertising spend is now equivalent to almost half (44%) that spent on all TV advertising, to 83% of advertising spend on ITV1, Channel 4 and Five and to one quarter (24.2%) of all press advertising.

Telecommunications and broadband

• By April 2007, 53% of UK households had a broadband connection. Headline broadband speeds – the maximum advertised speed of a service – have doubled over the last 12 months.
• The average blended headline broadband speed stood at 3.6Mbit/s at the end of 2006 compared with 1.6Mbit/s in the previous year. By June 2007 this had risen to 4.6Mbit/s.
• The increase in headline speeds is due in part to continued investment and growth in local loop unbundling, which enables operators to install their own equipment in BT’s exchanges and offer broadband services direct to consumers.
• Competition in the provision of phone services is also increasing. While BT is diversifying its revenue streams in other areas, its share of fixed voice call volumes fell below 50% for the first time in 2006 (48%) and its share of all telecoms connections (including mobile) fell below one in four (23%, down from 26% a year ago).
• Increased competition is driving down prices for consumers. Ofcom’s analysis of the cost of a typical basket of residential telecoms services (including a fixed line, two mobiles and a broadband connection per household, all at 2006 usage levels) shows that consumers would have paid £6.51 (9%) more for the same bundle of services in 2005 than in 2006. In the five years to 2006 the cost saving on the same bundle was £34.97 in real terms.

Radio

• While the total number of radio stations in the UK has increased through the expansion of Digital Audio Broadcasting (DAB) – in June 2007 there were 389 radio stations in the UK, 169 of which were available on DAB – the report shows that the total number of radio listening hours declined to an average of 19.8 hours per week per listener in 2006. This fell further to 19.4 hours in Q1 2007.
• The decline has been felt most in the commercial local radio sector: Between April 2005 and April 2006, average listening to local commercial radio fell by 4.1%.
• As listening has declined, so has commercial radio advertising revenue. Between 2001 and 2006, radio’s share of total advertising revenue in the UK fell 14.3% and in 2006 stood at £480m. Total revenue for local commercial stations fell 9.5%, from £169m in 2005 to £153m in 2006.
• By contrast, the report finds that people are increasingly tuning in to BBC radio. In the first three months of 2007, four out of the five most listened to stations were all BBC. The top five were BBC Radio 2, Radio 1, Radio 4, Classic FM and Five Live.
• The report also estimates that the BBC’s expenditure on radio, at £637m in 2006, is at its highest level in five years. This compares with £512m for the commercial radio sector, at its lowest level since 2002.

About the study: Ofcom is the independent regulator and competition authority for the UK communications industries, with responsibilities across television, radio, telecommunications and wireless communications services. “The Communications Market Report” is a 330-page report drawing on a mix of Ofcom’s own consumer research, operator data and third party sources. The data covers the year 2006; where available, more recent data is provided.