Analysis of the dwindling prospects of success for the United Kingdom's second national commercial DAB (digital audio broadcasting) radio multiplex and (correct) prediction that it might never be launched by Channel 4 Television which had been awarded the licence by media regulator Ofcom 15 months earlier, written by Grant Goddard for Enders Analysis in October 2008.

1. THE SECOND NATIONAL DIGITAL
RADIO MULTIPLEX
GRANT GODDARD
2 October 2008

2. • The second national digital radio multiplex, awarded by Ofcom in
July 2007 to 4 Digital Group, has not yet been built, despite having
promised a launch within twelve months
• Many local commercial analogue radio stations are presently forced
to broadcast on the DAB platform, despite these simulcasts adding
significant costs to their operations, as a consequence of accepting
an earlier offer from the regulator of an automatic renewal of their
licences
• Given declining industry revenues, commercial radio owners are
hard-pressed to maintain their broadcasts on the DAB platform, and
we urge the regulator to ‘decouple’ the issue of licence renewal from
participation in DAB
On 6th July 2007, Ofcom awarded the licence for the second national digital
commercial radio multiplex to 4 Digital Group Limited for a twelve-year period.
The shareholders of the company are Channel 4 (55%), Sky News (10%),
Bauer (10%), UTV (10%), Carphone Warehouse (10%) and UBC Media (5%).
4 Digital promised Ofcom that it would launch eight new national digital
stations “within twelve months”, and a further two such stations “within the
following eleven months”. Ofcom Chief Executive Ed Richards said: “Today’s
licence award is an important development for radio listeners who will benefit
from a greater variety of commercial national radio services. The award will
give a real boost to the DAB (Digital Audio Broadcasting) platform, which we
believe will form the cornerstone of radio provision in the future”. Ofcom
announced that 4 Digital “is committed to launching its service within one year
of the licence award (i.e. by July 2008)”.
Fifteen months later, none of the new digital radio stations promised by 4
Digital have yet launched. Ofcom has made no further announcements about
4 Digital; under normal circumstances, if a licensee fails to launch its service
within the prescribed timescale, its licence could be revoked under Section 53
of the Broadcasting Act 1996. Admittedly, ‘normal circumstances’ hardly
prevail in the world of DAB radio. Within weeks of Ofcom’s licence award to 4
Digital, the regulator announced that a Working Party was to be convened by
the Department for Culture, Media & Sport (DCMS) to examine the whole
implementation of digital radio, and its final report is due at year-end 2008. In
the meantime, Ofcom has been stonily silent on all aspects of its DAB policy.
For its part, 4 Digital has proven as coy as Ofcom about the progress made
with the launch of its new digital services. Its website still promises that
“services will be launching from summer 2008 onwards”. Our understanding is
that no contract has been signed with Arqiva to build the national transmitter
network for the multiplex. In fact, there are growing doubts whether this
multiplex will ever be built. It looks increasingly likely that, instead, 4 Digital
will close a deal with the owner of the first national digital commercial radio
multiplex, Digital One, for a shareholding and some of its unused broadcast
capacity (though certainly not for launching as many as the promised eight or
ten stations).

3. The reason that excess capacity remains on the DAB platform is that nobody
has yet found a way to generate operating profit from offering a digital-only
radio station. Advertisers have traditionally viewed radio as a ‘mass medium’,
so that the DAB platform’s current ability to deliver commercial stations with a
national audience of no more than a few hundred thousand listeners per week
each simply fails to pique their interest. As a result, the approximate £1 million
per annum transmission charge for one national digital station remains
impossible to recoup for potential content providers. 4 Digital is as susceptible
to these economic realities of DAB as any broadcaster, particularly at a time
when Channel 4 is hard pressed.
Other radio groups are proving just as reluctant to commit additional
expenditure to DAB, even those that have spent millions developing the
platform over the last decade. GCap Media has either closed or sold all its
digital-only radio services this year, despite owning the largest chunk of DAB
infrastructure, including significant stakes in the first national digital radio
multiplex and local multiplexes. Ashley Tabor, Chief Executive of GCap’s new
owner, Global Radio, said recently that spending time on digital radio is “a
huge distraction” and that DAB is “a red herring and not the main issue”
(Media Week, 16th September 2008). Neither is Tabor an advocate of forcing
consumers to migrate from analogue to digital radio: “Listeners will come
across to digital by osmosis if they want to – we must let the market decide”
(The Times, 17th September 2008).
Global and its fellow local DAB multiplex operators – Bauer, Guardian Media
Group, UTV and TIML – however, continue to simulcast their own and others’
local analogue radio stations on the platform. The reason these local stations
remain on DAB is that, abetted by Section 94 of the Broadcasting Act 1996,
the regulator had enticed them with an automatic eight-year extension to each
station’s licence if it was simulcast on the nascent platform. At the time,
despite DAB having almost no listeners, the owners accepted this ‘carrot and
stick’ regulation with the promise that, by now, DAB would have become the
dominant platform for radio. A decade later, the uncomfortable truth is that
digital switchover for radio remains as far over the horizon as it ever was.
Meanwhile, as a result of having to broadcast their stations on both analogue
and digital platforms for the foreseeable future, radio owners’ transmission
costs have multiplied up to ten times. These cost pressures are becoming
even less manageable at a time when commercial radio revenues are
declining, as they were down 10% year-on-year in Q2 2008. Commercial radio
hours listened are declining by around 5% per annum. To date, however,
Ofcom has seemed remarkably reluctant to tackle these pressing issues.
Ofcom’s present hardline strategy is to inform local commercial radio
licensees that, if they abandon their costly DAB simulcasts, their licence will
be immediately revoked and may not be re-advertised, or might be re-
advertised as a non-profit community radio licence. Such an approach,
although following the letter of the legislation, fails to address the currently
poor financial state of the sector.

4. Although the industry is maintaining a brave public face, it is close to crisis. It
is facing financial death as the costs of DAB transmission contracts erode
increasingly meagre operating profits in a business dominated by fixed costs.
The time will come (and sooner rather than later) when radio owners – large
and small – could be forced to confront Ofcom (or even DCMS) collectively
and demand a specific repeal of twelve-year old legislation. Addressing the
failed DAB strategy will require substantial compromises on both sides. The
commercial sector will have to write off hundreds of million pounds of
expenditure it has made over the last decade in the DAB platform. Ofcom will
have to admit that its DAB policy has failed and will need to rebuild its digital
radio strategy from the ground up.
It is accepted that the DAB ‘problem’ is sufficiently complex and intricate that
simple, short-term solutions are unlikely to be unearthed. However, the
present financial difficulties of the commercial radio sector could be
considerably eased if Ofcom would offer some kind of moratorium from its
extant DAB policy. Station owners should be allowed to decide on a purely
commercial basis whether they wish to broadcast on the DAB platform or not,
without the threat of Ofcom revoking their broadcast licence hanging over their
businesses. Such a moratorium might require a Parliamentary ‘Order’, for
which there is a precedent (legislation was quietly processed in 2006 to
enable BT Movio to use additional DAB spectrum for mobile TV). The end
result would be a far more commercially focused debate about the future of
the DAB platform, unencumbered by regulatory threats.
[First published by Enders Analysis as report 2008-92e.]
© 2008 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk