Final Report for Department for Business, Innovation and Skills and Department for Culture, Media and Sport
Market forecasts and other assumptions for consumer surplus
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- Consumer surplus calculations
- Assumptions for DTT and DTH producer surplus
- Producer surplus calculations
- Detailed results from the broadcast TV model
- £ million 2006
- £ million DTT Scenario a (base case) DTT scenario b
- £ million DTH DTT + DTH
- Broadcast radio model Consumer surplus
Market forecasts and other assumptions for consumer surplus Subscribers We have forecast the evolution of TV households by technology (DTH, DTT, cable, etc.) up to 2021, based on historical figures from Ofcom.137 After completion of the digital switchover, we assume that the share of free DTT users remains relatively constant over time, while the number of free DTH users increases to around 3 million by 2021. The total number of TV households increases by around 1% per annum (see Figure B .31). Figure B.31: Split of TV households per type of technology used on the primary screen – historical values and forecast [Source: Analysys Mason, 2012] 
We have also forecast the number of IPTV (BT Vision) subscribers for DTT consumer surplus calculations, based on estimates from PricewaterhouseCoopers,138 since BT Vision subscribers still use DTT to receive broadcast channels. ASPU Pay DTH ASPU has been set at £45 per month based on BSkyB data, and is assumed to increase by 3% per annum over the next ten years. Licence fee The TV licence fee is assumed to remain constant until 2015, in line with the current BBC licence settlement. Thereafter we assume that it will increase in line with increases in RPI. DTT set-top boxes, DTH receivers, antennas, satellite dishes and installation costs DTT set-top box costs are set to an average of £30 in 2011139 and then increase in line with changes in RPI. The volume of set-top boxes in 2010 is based on historical units sold; we then assume that no set-top boxes are sold from 2013 onwards, as all new TVs will have an in-built DTT tuner. We believe that the incremental cost of adding a DTT tuner to a TV set is small and, following the completion of digital switchover, can be offset against the cost of the analogue tuner that is no longer required. We have not considered the cost of TV sets in our calculations, an approach that is consistent with the 2006 study. DTH receivers are assumed to cost £120, a figure which is amortised over five years. We aggregated the cost of antennas with installation costs for DTT, and have assumed that 5% of DTT households require a new antenna each year. For free DTH, satellite dishes and installation costs are set at £55, bringing the total free-DTH installation cost to £175, in line with BSkyB’s Freesat package. Choke prices In our base case the choke price for DTT is based on the value used in the 2006 report140 adjusted for the increase in RPI since 2006, but with an additional 10% uplift applied. The uplift is an estimate of additional willingness to pay for HD content. (There is strong evidence that pay-TV customers are willing to pay extra for HD, since over 40% of Sky’s customers pay an additional £10 per month for this service.141 We therefore believe that it is reasonable to assume that free-to-air customers would also be willing to pay more.) The willingness to pay data is for the five main PSB channels, plus an addition for digital-only channels. We note that since 2006 the share of the five main PSB channels has fallen from 67% to 56%. As a sensitivity, we have also considered a 20% reduction in the choke price compared to the base case. This might represent a future situation where viewers watch a much higher proportion of non-broadcast on-demand TV (such as the BBC iPlayer, which streams video over the internet and so does not use spectrum) than they do at present and thus place a lower value on broadcast TV. Figure B .32 shows our assumption regarding the evolution of choke prices for DTT and free and pay DTH for the base case. Figure B.32: Choke prices – base case [Source: Analysys Mason, 2012] 
Consumer surplus calculations Consumer surplus is calculated for DTT and free DTH using the formula: 
and for pay DTH using the formula: 
We have calculated annual values for 2011 so that they can be compared with the findings of the 2006 Europe Economics study. We have also compared our figures against the results of the 2006 study, updated for the change in RPI between 2006 and 2011. Finally, we provide calculations of the net present value of the cumulative consumer surplus over a ten-year period from 2012 to 2021. We chose a ten-year period for the longer term to match the mobile calculations, although we note that the technology cycles in TV broadcasting may be much longer (e.g. 625-line analogue colour TV was the dominant standard for over 30 years). The net present value is calculated by assuming a social discount rate of 3.5% per annum. Assumptions for DTT and DTH producer surplus Licence fee revenue This is linked to the licence fee revenue in the consumer surplus calculation, and is calculated by dividing the total licence fee revenue by the number of TV households. This leads to slightly lower revenue per household than the annual licence fee, reflecting both the level of non-payment and the fact that citizens over 70 years of age are exempt from the fee. The model takes into account the fact that, from 2013, £150 million per year of TV licence revenue will be used to fund rural broadband projects, and assumes that the BBC’s commitment to fund BBC Monitoring from 2013 (at an assumed cost of £20 million per annum) and the BBC World Service from 2014 (at an assumed cost of £227 million per annum) will not directly contribute to any benefit from DTT either. Advertising revenue Advertising revenue is based on figures (historical and forecasts to 2015) from PricewaterhouseCoopers,142 with a nominal growth rate of 3% per annum assumed after 2015, and split between technologies based on their shares of TV households. These ratios are assumed to remain stable over time. DTT costs DTT opex comprises the following items: Distribution opex: this cost is calculated based on the number of sites (main transmitters and relays). These numbers of sites are based on actual figures available from Digital UK. The opex per site is set at £360 000 per annum for main transmitters and at £48 000 per annum for relays in 2010, with costs increasing in line with RPI Programming costs: these costs include baseline programming costs set at 18% of revenue and variable costs linked to the increase in the number of SD and HD channels available. An uplift of 10% (progressively decreasing) is applied to take into account the premium paid for HD channels Other opex: this cost is set at 10% of revenue. DTT capex comprises the following items: Capex for new sites: this cost takes into account the building of new sites, with unit costs of £230 000 for main transmitters and £190 000 for relays in 2010 Distribution costs per site: set at £28 000 for main transmitters and £24 000 for relays in 2010 Replacement costs: corresponding to 7% of cumulative capex per annum Marketing and communication costs related to the switchover process: estimated at £600 million143 and split between 2010 (10%), 2011 (30%) and 2012 (60%). DTH costs DTH opex comprises the following items: Programming costs: these are set at 36% of DTH revenue, in line with actual figures from BSkyB Costs for satellite capacity: these are based on the number of SD and HD channels available, with a unit cost that rises in line with inflation. SD channel unit costs are set at £500 000 per year and HD channel unit costs are set at £2 million per year. Historical figures thus calculated are in line with BSkyB published results for 2009 and 2010 Other opex: this includes client management, marketing and G&A costs, and is set at 38% of revenue in 2011 (declining to 35% in 2021). DTH capex is estimated at 7.5% of DTH revenue (BSkyB states in its reports that it aims to maintain annual capex at around 6.5% of revenue, although this has been exceeded in recent years). Producer surplus calculations Producer surplus is calculated using the formula: 
We have calculated annual values for 2011 so that they can be compared with the findings of the 2006 Europe Economics study. We have also compared our figures against the results of the 2006 study, updated for the change in RPI between 2006 and 2011. Finally, we provide calculations of the net present value of the cumulative producer surplus over a ten-year period from 2012 to 2021. The net present value is calculated by assuming a discount rate of 3.5% per annum (i.e. the same as in the consumer surplus calculation). Detailed results from the broadcast TV model In addition to the overview of the results presented in Section 4.3.1, Figure B .33 below shows our results for 2011, and compares them against the results of the 2006 study (a) as originally presented, and (b) increased in line with the percentage change in RPI from 2006 to 2011. We also show a net present value (NPV). The discount rate used is the same as for public mobile. Figure B.33: Surplus from TV broadcasting [Source: Analysys Mason, 2012]
Note: all results have been rounded to 3 significant digits. We have not included the cost of TV sets in the consumer surplus calculation (nor was it included in the 2006 study). According to European Information Technology Observatory reports, £3.65 billion was spent on TV sets in the UK in 2011, which is equivalent to 59% of the consumer surplus for 2011 (the corresponding expenditure for 2006 was £3.9 billion, which was 115% of the adjusted consumer surplus). The results of the sensitivity based on lower willingness to pay for DTT are compared with the base case in Figure B .34; this is then added to DTH, and the resulting overall range of surplus from TV broadcasting is shown in Figure B .35. Figure B.34: Sensitivity analysis of surplus from DTT [Source: Analysys Mason, 2012]
Note: all results have been rounded to 3 significant digits. Figure B.35: Surplus from DTH and resulting range of surplus from TV broadcasting [Source: Analysys Mason, 2012]
Note: all results have been rounded to 3 significant digits. Broadcast radio model Consumer surplus In order to calculate the consumer surplus from radio broadcasting we have considered the growth in radio listeners and adjusted the willingness to pay information from the 2006 study to reflect the increase in RPI since 2006.145 We have calculated consumer surplus as follows: 
We did not subtract the cost of a TV licence, as there is no requirement for radio listeners to purchase a TV licence, and because licence fee revenue is taken into account in the consumer surplus calculation for TV broadcasting including it here would result in double-counting. Producer surplus We have calculated producer surplus using the same accounting methodology as for the 2006 study. This involves calculating the economic cost for each producer by considering the producer’s assets over a number of years and then subtracting this from revenue to calculate a producer surplus for the current year (2011 in our case). This is then projected forward to 2021 by assuming the same producer surplus CAGR over the forecast period as was seen between 2006 and 2011. For public companies, accounts were obtained from annual reports, whilst we obtained the accounts of privately held companies from Companies House. The economic cost of a company considers the fact that the producer’s capital is tied up in assets which it requires to provide a service, and there are potentially alternative uses for this capital, such as investing in bonds. This cost of capital is given as: 
The economic cost is thus a measure of the additional value created by employing this capital for producing, as opposed to using it for these alternative uses. In practical terms, the cost of capital consists of the cost of labour, goods sold (e.g. the cost of making radio programmes), equipment, buildings and machinery, and stock. There are a number of adjustments that must be made to these figures: Values from company accounts from year to year are given in nominal terms, hence the figures must be adjusted for RPI in order to extract the real changes in capital Balance sheets generally show the value of tangible assets as the historical cost minus an accounting allowance for depreciation, and so this figure does not accurately represent the true economic cost of the asset. In order to calculate the true economic cost, it is necessary to study the level of investment over a longer period (where possible, we have considered five years), whilst taking into account the service life of an asset.146 The cost of economic stock is then given as: 
This is the value that the capital employed could have earned if it had been put to the next best use, minus depreciation. The economic cost follows as: 
This is subtracted from the revenue in that year to give producer surplus. More detail of the methodology can be found in the 2006 paper published by Ofcom.147 We have considered the company accounts of the main commercial radio broadcast companies (Global Radio UK, UTV Radio, Bauer Radio,148 UBC Media Group, Tindle Radio Group, Litt Corporation and UKrd Group Ltd).149 Based on the revenue that these companies earn from radio broadcasting, we believe that they represent 92% of the UK radio broadcast market. The total producer surplus is scaled up by a factor of 100/92 to take into account the remaining 8% of the market.
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