29th Jun 2005 07:01
Office of Communications29 June 2005 Conclusion of the review of Channel 3 and Channel 5 financial terms 29 June 2005 As required under Section 227 of the Communications Act 2003, Ofcom has todaypublished the conclusion of its review of the financial terms of the Channel 3licences held by ITV plc, SMG plc, Ulster Television plc and GMTV Ltd and of theChannel 5 licence. These reflect the value of all the rights and obligations inthe licences, and in particular the value of access to scarce spectrum. This decision is the last in a series taken by Ofcom over the past two yearswhich, when taken together, allow commercially-funded public servicebroadcasters the scope to plan with certainty for all-digital televisionservices across the UK. The other relevant decisions are summarised in the briefing document attached tothis news release; today's decision should be viewed in the context of theprevious regulatory decisions set out in the briefing document. In 2003, under the current licence terms, annual payments to HM Treasury for allChannel 3 and Channel 5 licences combined were approximately £270m. In 2004,under the current licence terms, this fell to £230m, primarily as a result ofthe growth of digital households. In 2005, under the current licence terms, and as the growth of digitalmultichannel television increases, this would fall to approximately £180m in2005. If licensees accept the revised terms offered today, which take account ofthe expected completion of digital switchover by 2012, Ofcom estimates thattotal payments for all Channel 3 and Channel 5 licences in 2005 would beapproximately £90m. The actual level of future payments is dependent upon advertising revenue anddigital take-up during the year. Ofcom does not disclose individual licencepayments by licensee. The relevant factors Ofcom's approach seeks to set terms which are reasonable within the context ofthe current market environment and which continue to be reasonable for theperiod of the licence, from 2005 to 2014. By assessing each licence within thecontext of a coherent single process, Ofcom has been able to take into accountthe progress towards digital switchover, developments in the televisionadvertising market and the outcome of its Public Service Broadcasting Review. Since previous reviews in 1999-2001, the value of access to the analoguespectrum has declined significantly, with under 40% of UK households relyingsolely on analogue for their television viewing. As homes continue to migratefrom analogue to digital, the share of advertising derived as a result of accessto the analogue spectrum will continue to decline and the proportion ofadvertising revenue earned by analogue channels overall is likely to fall. Ofcomhas taken account of these trends, alongside the licensees' public servicebroadcasting obligations, in setting the new terms. In accordance with thestatute, Ofcom has also valued each licence singly, as though it were beingauctioned separately. Under the statute, licence payments consist of both an annual cash payment(which increases in line with inflation) and a Percentage of Qualifying Revenue(PQR). In setting new terms, Ofcom is required under the statute to determine anew PQR and a cash payment as though the licence were being put up for auction. Ofcom will seek to recover up to 95% of the value of the licences through PQR.It is important to note that in collecting the payments, the PQR is applied onlyto advertising and sponsorship revenue attributable to analogue-only households.Therefore, as more households turn to digital, these payments will also decline.At the point of digital switchover for each licence, the analogue rights foreach licence will cease to have any value, also on a licence-by-licence basis. Background The financial terms were originally set after a competitive tender processconducted 14 years ago in the case of the Channel 3 licences and 10 years agofor Channel 5. The terms were subsequently reviewed and determined, on a licenceby licence basis, over a scattered range of dates. When Ofcom assumed its powers, it therefore inherited multiple, separate licenceterms, with differing timescales and differing processes for review andrevaluation. Ofcom subsequently brought the review of financial terms into asingle unified process, intended to create a coherent financial and licensingregime for commercially-funded public service broadcasting. This is likely to be the last time that reviews on this scale are undertaken. Next steps The licensees have until 25 July 2005 to inform Ofcom that they wish to acceptthe terms. If accepted by the licensees, the revised terms will be backdated toapply from 1 January 2005 and will run to 31 December 2014. The monies raisedare collected by Ofcom, but then paid to the Consolidated Fund of HM Treasury. Ulster Television plc, which holds the Channel 3 licence for Northern Ireland,has already informed Ofcom that it is accepting the new financial termsannounced today. The financial terms announced today (including cash sum and PQR figures bylicensee) can be found in the full background note available online atwww.ofcom.org.uk The briefing document putting today's decision into the context of previousrelevant regulatory decisions follows below. BRIEFING Financial and licensing regime for commercially-funded public service broadcasting Today's decision should be viewed alongside other Ofcom conclusions in sixseparate but linked areas of television broadcasting regulation: 1. Analysis of rationale for the merger of Granada plc and Carlton plc to Completed November 2003 form ITV plc and implementation of CRR remedy 2. The outcome of Ofcom's Public Service Broadcasting Review. Completed February 2005 3. Public service broadcasting commitments in the Nations and Regions. Completed June 2005 4. Indicative timetable for digital switchover; Published February 2005 Establishment of SwitchCo; and Completed April 2005 Details of post-switchover coverage. Published June 2005 5. Codes of Practice governing terms of trade between broadcasters and Completed January 2004 independent producers. 6. As published today (and included here for completeness), the conclusions Published today of the reviews of Channel 3 and Channel 5 financial terms. Separately, and as previously stated in its Public Service Broadcasting Review,Ofcom will assess options for the future funding of Channel 4, to be completedin 2006/7. By this point the Government will also have reached its decisions -through the White Paper and Charter Review - on the future of the BBC in thecontext of public service broadcasting as a whole. 1. Merger to create ITV plc Ofcom provided analysis to the Competition Commission in its assessment of theproposed merger between Granada plc and Carlton plc and supported the mergerrationale as a means of strengthening the delivery of commercially-funded publicservice broadcasting. Ofcom also took on responsibility for implementing theContract Rights Renewal (CRR) remedy, overseen by the independent CRRAdjudicator, to protect the interests of the advertising community. 2. Public Service Broadcasting (PSB) obligations Commercially-funded public service broadcasters commit to fulfilling publicservice obligations in return for privileged access to spectrum. As audienceshare and advertising revenues derived from analogue broadcasting decline amidthe growth of digital multichannel, the value to those broadcasters of access toanalogue spectrum declines accordingly. In concluding its Public Service Broadcasting Review, Ofcom identified thisreality. It set out its proposals for maintaining the public servicebroadcasting obligations which were sustainable through the transition todigital and which extensive audience and market research revealed mattered mostto viewers. These were specifically: 1. News: Sustained commitment to regional, national and international news and current affairs; 2. Original programming: High levels of original programming across a range of genres; and 3. UK production: Further investment in original production from a range of production centres across the UK. In Ofcom's view, the combination of these three core obligations will form thebedrock of commercially-funded public service broadcasting throughout thetransition from analogue to wholly digital broadcasting. 3. The Nations and Regions With the publication of the final report of its Public Service BroadcastingReview and after further consultation, Ofcom recognised the particular anddistinctive public service broadcasting obligations which are most valued byviewers in the Nations and Regions. These include detailed measures to ensure the continuance through the transitionto digital of National news, non-news and indigenous language programming whichreflects the characteristics of each Nation. 4. Progress towards digital switchover Four years ago multichannel television reached 38% of UK households; as of June2005, 62% of households receive digital multichannel, with a current rate ofgrowth of around 60,000 additional households a week. The financial termsannounced today take into account the transition to a wholly digital televisionworld expected to be achieved between 2008 and 2012. 5. Independent production sector Ofcom's approval of the Codes of Practice governing terms of trade betweenbroadcasters and the independent production sector provide greater certainty forcompanies in the creative sector to invest for the long-term. With more effective access to capital secured through clearer ownershipagreements on intellectual property rights, independent producers will continueto play an integral role in the supply of public service broadcasting throughswitchover and beyond. 6. Conclusion of the reviews of Channel 3 and Channel 5 financial terms Finally, and as explained in the accompanying news release, Ofcom has todaypublished the conclusion of its review of the financial terms of the Channel 3licences held by ITV plc, SMG plc, Ulster Television plc and GMTV Ltd and of theChannel 5 licence. Ofcom Chief Executive Stephen Carter said: "Digital television transfers controlfrom broadcaster to viewer. This process puts pressure on commercially-fundedpublic service broadcasting." He added: "We have now done all we can to give broadcasters regulatorycertainty. It is now up to the broadcasters to deliver; and it is for Governmentto assess whether other sources and recipients of funding for public servicebroadcasting will be needed. We believe that they will be." Ends. NOTES FOR EDITORS AND CSEs Ofcom is the independent regulator and competition authority for the UKcommunications industries, with responsibilities across television, radio,telecommunications and wireless communications services. For further details please visit www.ofcom.org.uk. CONTACT Ofcom Media [email protected](+44) (0)20 7981 3033 This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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