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Wednesday 29 June, 2005

OFCOM

C3 and C5 financial terms

Office of Communications
29 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 today
published the conclusion of its review of the financial terms of the Channel 3
licences held by ITV plc, SMG plc, Ulster Television plc and GMTV Ltd and of the
Channel 5 licence. These reflect the value of all the rights and obligations in
the 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 years
which, when taken together, allow commercially-funded public service
broadcasters the scope to plan with certainty for all-digital television
services across the UK.

The other relevant decisions are summarised in the briefing document attached to
this news release; today's decision should be viewed in the context of the
previous regulatory decisions set out in the briefing document.

In 2003, under the current licence terms, annual payments to HM Treasury for all
Channel 3 and Channel 5 licences combined were approximately £270m. In 2004,
under the current licence terms, this fell to £230m, primarily as a result of
the growth of digital households.

In 2005, under the current licence terms, and as the growth of digital
multichannel television increases, this would fall to approximately £180m in
2005. If licensees accept the revised terms offered today, which take account of
the expected completion of digital switchover by 2012, Ofcom estimates that
total payments for all Channel 3 and Channel 5 licences in 2005 would be
approximately £90m.

The actual level of future payments is dependent upon advertising revenue and
digital take-up during the year. Ofcom does not disclose individual licence
payments by licensee.

The relevant factors

Ofcom's approach seeks to set terms which are reasonable within the context of
the current market environment and which continue to be reasonable for the
period of the licence, from 2005 to 2014. By assessing each licence within the
context of a coherent single process, Ofcom has been able to take into account
the progress towards digital switchover, developments in the television
advertising market and the outcome of its Public Service Broadcasting Review.

Since previous reviews in 1999-2001, the value of access to the analogue
spectrum has declined significantly, with under 40% of UK households relying
solely on analogue for their television viewing. As homes continue to migrate
from analogue to digital, the share of advertising derived as a result of access
to the analogue spectrum will continue to decline and the proportion of
advertising revenue earned by analogue channels overall is likely to fall. Ofcom
has taken account of these trends, alongside the licensees' public service
broadcasting obligations, in setting the new terms. In accordance with the
statute, Ofcom has also valued each licence singly, as though it were being
auctioned 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 a
new 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 only
to 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 for
each 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 process
conducted 14 years ago in the case of the Channel 3 licences and 10 years ago
for Channel 5. The terms were subsequently reviewed and determined, on a licence
by licence basis, over a scattered range of dates.

When Ofcom assumed its powers, it therefore inherited multiple, separate licence
terms, with differing timescales and differing processes for review and
revaluation. Ofcom subsequently brought the review of financial terms into a
single unified process, intended to create a coherent financial and licensing
regime 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 accept
the terms. If accepted by the licensees, the revised terms will be backdated to
apply from 1 January 2005 and will run to 31 December 2014. The monies raised
are 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 terms
announced today.

The financial terms announced today (including cash sum and PQR figures by
licensee) can be found in the full background note available online at
www.ofcom.org.uk

The briefing document putting today's decision into the context of previous
relevant 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 six
separate 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 completed
in 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 the
context of public service broadcasting as a whole.

1. Merger to create ITV plc

Ofcom provided analysis to the Competition Commission in its assessment of the
proposed merger between Granada plc and Carlton plc and supported the merger
rationale as a means of strengthening the delivery of commercially-funded public
service broadcasting. Ofcom also took on responsibility for implementing the
Contract Rights Renewal (CRR) remedy, overseen by the independent CRR
Adjudicator, to protect the interests of the advertising community.

2. Public Service Broadcasting (PSB) obligations

Commercially-funded public service broadcasters commit to fulfilling public
service obligations in return for privileged access to spectrum. As audience
share and advertising revenues derived from analogue broadcasting decline amid
the growth of digital multichannel, the value to those broadcasters of access to
analogue spectrum declines accordingly.

In concluding its Public Service Broadcasting Review, Ofcom identified this
reality. It set out its proposals for maintaining the public service
broadcasting obligations which were sustainable through the transition to
digital and which extensive audience and market research revealed mattered most
to 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 the
bedrock of commercially-funded public service broadcasting throughout the
transition from analogue to wholly digital broadcasting.

3. The Nations and Regions

With the publication of the final report of its Public Service Broadcasting
Review and after further consultation, Ofcom recognised the particular and
distinctive public service broadcasting obligations which are most valued by
viewers in the Nations and Regions.

These include detailed measures to ensure the continuance through the transition
to digital of National news, non-news and indigenous language programming which
reflects the characteristics of each Nation.

4. Progress towards digital switchover

Four years ago multichannel television reached 38% of UK households; as of June
2005, 62% of households receive digital multichannel, with a current rate of
growth of around 60,000 additional households a week. The financial terms
announced today take into account the transition to a wholly digital television
world expected to be achieved between 2008 and 2012.

5. Independent production sector

Ofcom's approval of the Codes of Practice governing terms of trade between
broadcasters and the independent production sector provide greater certainty for
companies in the creative sector to invest for the long-term.

With more effective access to capital secured through clearer ownership
agreements on intellectual property rights, independent producers will continue
to play an integral role in the supply of public service broadcasting through
switchover 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 today
published the conclusion of its review of the financial terms of the Channel 3
licences held by ITV plc, SMG plc, Ulster Television plc and GMTV Ltd and of the
Channel 5 licence.

Ofcom Chief Executive Stephen Carter said: 'Digital television transfers control
from broadcaster to viewer. This process puts pressure on commercially-funded
public service broadcasting.'

He added: 'We have now done all we can to give broadcasters regulatory
certainty. It is now up to the broadcasters to deliver; and it is for Government
to assess whether other sources and recipients of funding for public service
broadcasting 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 UK
communications industries, with responsibilities across television, radio,
telecommunications and wireless communications services.

For further details please visit www.ofcom.org.uk.

CONTACT

Ofcom Media Office
mediaoffice@ofcom.org.uk
(+44) (0)20 7981 3033




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