Examination of Witnesses (Questions 278-279)
OFCOM
13 DECEMBER 2005
Q278 Chairman: Good morning everybody.
Welcome to the next of our sessions examining the Government's
plans for analogue switch-off beginning in 2008. We are taking
evidence this morning from two of the leading bodies responsible
for delivering that programme, the first of which is Ofcom. We
are pleased to welcome Stephen Carter, the Chief Executive, Ed
Richards and Greg Bensberg. Thank you all for joining us. Can
I begin by asking you perhaps to give an overview of why Ofcom
believes that switch-off is in the national interest and the advantages
which will result from it?
Mr Carter: Certainly, Chairman.
Thank you for the invitation to appear before the Committee. We
thought because it was the season of goodwill to all men and select
committees we would come with a small present, because we have
been asked to produce a simple glossary of terms. Hopefully the
booklet we have circulated is of some practical use. We were first
asked to address this question by the Secretary of State early
in 2003 where we were required under the Communications Act to
provide an update to the Secretary of State on the progress towards
digital take-up and what the obstacles were towards participation.
We produced a relatively substantial report in March/April 2003
which laid out a series of recommendations. Inherent in that was
a view expressed by us that for three reasons it would be sensible
for a clear Government policy of digital switch-over to be developed,
the first of which was spectrum efficiency. As this Committee
of all committees will know, we have a statutory responsibility
to ensure the efficient use of the spectrum. There are two benefits
of digital switch-over: one is the release of the spectrum; so
once you take that percent of the spectrum that is going to be
reserved for the broadcasters in digital you are then releasing
just over 110 MHz of high quality UHF spectrum; then of course
that spectrum then gets used, so there is the value of it when
it is released to the market and then there is the benefit of
it depending upon how it is used. The benefits of both of those
were seen to be of significant advantage. The second issue was
one of choice. We are fortunate in this country to have a substantially
developed digital television market largely, in the first instance,
driven by a pay offering from the satellite provider and then
complementarily by the cable network operators, although more
geographically restricted. What DTT does, of course, is it provides
a free-to-air choice for consumers; so it removes the compulsion
to have to pay from those consumers and viewers who want to participate
in digital services. That was the second reason. The third reason
is, of course, the reason why digital television has been so successful
just as a market product, that it affords people a better service;
the picture quality is better; you have less interference; you
have less ghosting; there are more services; there are more channels
and what the technology is capable of providing to the television
set in terms of interactivity and participation in the viewing
experience. For a combination of those reasons—spectrum
efficiency and providing a free-to-air platform, so people were
not compelled to pay if they wanted to participate in the digital
television era; and also making the television service better,
richer and broader—there seemed to us to be three very substantial
benefits. The Government then did a cost-benefit analysis, which
I know you have seen and I am sure we will come to; and then we
pursued the obligations that we would be required to lay on the
broadcasters when we issued their digital replacement licences
which we were required, again by statute, to issue by the end
of 2003. A key part of that which relates to this question is
an obligation to ensure that the digital service matches the analogue
service. The analogue service currently covers about 98.5% of
the population so there is a universal analogue service today.
The obligation in those new licences is that there would be a
matching of that service in the digital terrestrial world.
Q279 Paul Farrelly: You rightly said
that we would come to a cost-benefit analysis. Thank you very
much for your very handy glossary. When we first started this
inquiry we had a panel of independent analysts, including David
Elstein, who cast doubt on not only the need for switchover itself
but also cast doubt on the Government's cost-benefit analysis,
largely because there was a vacuum of information there on what
constituted that analysis. I know you have submitted some evidence
and we have asked the Department to provide more evidence on their
cost-benefit analysis, but can you now in public just give us
your assessment of the Government's own analysis in relation to
the digital switchover process?
Mr Carter: I read David's evidence,
and indeed David has not been quiet on this subject generally,
I think it would be accurate to say! Our view is that the cost-benefit
analysis that was commissioned, I think originally by the DTI,
is what it is. It has to be said, one of the nigh on impossible
questions is: what will the monetary value of the spectrum be
when it is released? There are a number of existing proxies in
the market that you could compare it to. You could compare it
to the 3G auction. In our view that would be an inaccurate comparison,
but you could do that. The spectrum is of similar quality although
not of similar amount—it is about two-thirds. It is about
two-thirds of the spectrum available at 3G option, so it is a
substantial quantity of spectrum of similar quality in terms of
its propagation characteristics and usability. Nevertheless, I
do not think anyone doubts that it will have substantial value;
but spectrum value is almost entirely determined by the point
in time at which it is released to the market and what the market
circumstances are then. The benefits I think are reasonably clearly
laid out. The costs for a while were slightly less clear. We published
a report about three weeks ago to try and help inform the debate,
particularly around some of the power consumption and conversion
costs. Based on that analysis we have laid out a unit by unit
cost for those households who believe they will fall into the
"compelled group", and therefore compelled costs rather
than voluntary costs. That gives you a figure of somewhere in
the region of £530- £560 million. Our judgment is, as
best as the analysis and the information can give you at the moment,
the cost-benefit analysis will tell you that this is a sensible
judgment. There needs to be prior planning. You cannot do digital
switchover without prior planning. Our view is that the Government
has been sensible in building a timetable which has got some slippage
for mistakes, and also reflects the natural replacement cycle
in the market. The other cost variable of course is the cost of
the equipment. This is now the smallest bit of DTT converter you
can buy on the market which costs about £50 or £60.
You can buy one which is slightly larger but it is cheaper at
about £25. Of course as the volumes go up the prices will
go down. There is an absolute connection between driving the costs
down and an absolute commitment to the programme; because of course
then the manufacturing and retail supply chain aligns itself behind
the fact that it is going to happen and you get scale-on-scale,
which gives you volume, and volume gives you price reductions.
I would say that if you were to go back to the DTI cost-benefit
analysis when it was done I think you would find the costs would
go down rather than go up.
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