Ofcom's Digital Dividend Review The Directgov response
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Ofcom’s Digital Dividend Review
The Directgov responseDigital Dividend Review: Directgov Response, March 20th 2007
Digital Dividend Review: the Directgov Response
Executive Summary
Directgov, part of the Central Office of Information (COI), welcomes Ofcom’s
market-based approach to the allocation of the digital dividend. Directgov also
supports Ofcom’s intention to “maximise the value that the use of this
spectrum is likely to bring to society over time.”
However, we believe this objective cannot be reached through a purely
market-based auction approach which, unmodified, would merely maximise
revenue generation – an outcome which Ofcom is very clear in stating is not
its objective. Our view therefore is that under the existing proposals, there is
clear potential for market failure, which cannot be addressed by the availability
of other platforms. Public sector and voluntary bodies will not be able to
compete with commercial operators, and will effectively be prevented from
taking advantage of the digital dividend, despite offering services which
deliver real social value.
Directgov is proposing a proportion of the dividend is ring-fenced for social
value use, and is auctioned between social value bidders; in effect an
extension of Ofcom’s market-based approach. We believe this would address
the market failure created by the proposed system whilst overcoming Ofcom’s
concerns around allocating specific uses or users.
A social value spectrum allocation would allow a free market to prosper, with
all the associated benefits,(e.g. promoting consumer choice and efficient use
of spectrum), whilst also allowing services to flourish which have a strong
business case in terms of social value, but no commercial model.
Introduction
Directgov is at the forefront of the government’s efforts to use digital
communications to reach key audiences in creative and innovative ways. A
multi-channel proposition, Directgov, is a single point of entry through which
citizens can access information about all key public services. Citizens can find
out about everything from renewing their car tax to researching local schools.
This document sets out our response to Ofcom’s Digital Dividend Review
consultation and proposes a mechanism by which a market-led approach can
be used to maximise social as well as commercial value.
1Digital Dividend Review: Directgov Response, March 20th 2007
We strongly support a market-based approach
Directgov welcomes Ofcom’s approach which aims to both increase choice
and allow consumers to decide what services they would like. It endorses the
view that a more flexible approach with increased trading of spectrum will
encourage all users to be more efficient in their use of spectrum, thereby
creating greater opportunities for all.
In particular, Directgov welcomes Ofcom’s desire to ensure the digital
dividend creates benefit to society:
“Our objective in releasing the digital dividend is to maximise the value that
the use of this spectrum is likely to bring to society over time.” 1
However, Directgov is concerned that this objective cannot be met with a
purely market based auction approach as this simply maximises revenue
rather than social value.
Potential for market failure
Directgov believes that current plans, as set out in Ofcom’s consultation
document, effectively prevent a whole range of public, voluntary and other not
for profit organisations from taking advantage of the opportunities created by
the digital dividend.
The recent market rate for a single video stream on a Freeview multiplex has
been around £12m per year, a price well beyond the reach of non-commercial
organisations. Given the level of demand for space on Freeview it seems fair
to assume that even with new capacity created by the end of analogue TV,
prices will remain high; effectively preventing non-commercial broadcasters
from securing spectrum.
Yet, non-commercial organisations do create broadcast services which have
wider social value and which are held in high esteem by the public. A good
example is Directgov, a multi-channel proposition, where citizens can access
information about all key public services. Online users can find information on
a wide range of services including education and learning, welfare benefits,
pensions and local council services. The online service is very interactive:
users can use the service to apply to renew car tax or search for information
on a local school. Directgov’s mission is to provide public services all in one
place. By enabling citizens to find relevant information and services quickly
and effectively, Directgov makes public services far more accessible to the
general public.
There is strong evidence to show that Directgov is increasingly successful in
doing this. For Directgov as a whole, traffic has increased steadily since
1
Digital Dividend Review Consultation, Ofcom (December 2006) 1.22
2Digital Dividend Review: Directgov Response, March 20th 2007
launch from around 632,000 visits in June 2004 to more than 4m in January
2007.
Currently, Directgov is available online, on mobile and via cable and satellite
TV as an interactive text service. Directgov’s TV text service is becoming
increasingly attractive to users, and offers a range of services including the
ability to contact a learndirect advisor, order legal help leaflets, order driving
licence applications and access local council services. Directgov’s presence
on TV platforms increases its overall availability but, crucially, it also enables it
to reach audience groups which are hard to reach through a purely online
service, such as older people and those not working.
Research shows that 66% of those accessing Directgov through cable or
satellite TV are not working, and over 50% of those who are working are
manual workers and are far less likely to have access to the internet at work.
In addition, 38% of Directgov’s TV users are over 45, and 15% are over 55.
Overall, over half of Directgov’s television users use the internet less than
once a month. Without this TV presence, Directgov would find it hard to reach
these audience groups, who are key users of public services. 2
The lack of available spectrum and prohibitively high carriage costs means
Directgov does not currently have a presence on Freeview. However,
Directgov believes that Freeview is especially important for social value
purposes because it is a free platform. Our aim is to provide support to all UK
citizens without forcing them to pay for premium services. In addition,
Freeview’s unique status as a free digital platform means that its audience is
certainly likely to include those who have most to benefit from the delivery of
social value broadcasting.
One argument that has been put forward is that if a public sector user believes
their service is really worthwhile, they should either allocate more of their
existing funds to buy spectrum on the open market, or lobby for additional
funding. We believe that this argument misses the point: Ofcom’s objective is
not to maximise revenue at all costs but to maximise the benefits to society of
the spectrum. There are two very good reasons why it is unlikely that public
sector or other social users are going to be unable to pay open market prices
for this spectrum. Firstly because the market prices of Freeview spectrum,
once in commercial hands, massively distort business models that are driven
by social value rather than commercial return and in effect put Freeview
spectrum beyond the public and not-for-profit sectors’ reach. Secondly
because the circular purchase of a public asset through one or more
commercial enterprises appears to be a particularly wasteful use of public
money: essentially paying commercial profit margin to buy spectrum back
when it was clear from the outset that the public sector could have made good
use of it. In this regard spectrum is not like other utilities bought from
commercial organisations by the public sector; it is a public asset in the first
place and, as part of its objective to maximise social value, Ofcom has an
2
Directgov online survey Q1 2007
3Digital Dividend Review: Directgov Response, March 20th 2007
opportunity to construct the market from the outset in the most efficient way
possible.
Digital Terrestrial Television is already a mature market where the pressures
on spectrum are clear to see. The other potential uses of spectrum (such as
mobile TV or wide area wireless broadband) are nascent models but we
believe it is only prudent to expect that the same model of demand
outstripping supply could apply to these uses too; again effectively pricing
them beyond the reach of social value users. Therefore we would argue that,
whilst the Directgov’s immediate concern is Freeview, any adjustments to
Ofcom’s model should be applied to all possible uses of the Digital Dividend
spectrum.
The concept of social value is one which Ofcom has used successfully in
previous consultation exercises, for example, in Ofcom’s work on public
service broadcasting. In the annex to its consultation, Ofcom has set out a
number of components of “broader social value” including access and
inclusion, quality of life, belonging to a community, education citizens , cultural
understanding and informed democracy. Directgov actively promotes all
these aspects of social value.
In summary, Directgov believes Ofcom’s existing proposals do not reflect its
stated objective of ensuring “that the use of spectrum brings as many benefits
as possible to the UK’s citizens and consumers” because they effectively
prevent non commercial operators, who have the potential to offer valued and
valuable services, from competing for spectrum. In fact Ofcom’s proposal
would lead only to revenue maximisation.
Alternative platforms do not provide the answer
Ofcom states that one reason why it is in favour of a market led approach to
allocation is that other ways of delivering services exist; primarily broadband,
cable and satellite, which have unlimited capacity.
However, although broadband is growing fast it is still forecast to be present in
only 76% of homes by 2012, compared to 98.5% DTV penetration in the same
year.3 In addition, broadband is not a direct substitute for broadcast in many
situations. As already stated, Directgov’s TV users tend to be older, and are
less likely to be working than its PC-based users..
Satellite TV, including Freesat from Sky, is in little more than a third of all
homes. Even with the launch of a BBC Freesat offer, Freeview is likely to
continue to dominate digital TV distribution. And, as argued above, the nature
of Freeview as a free platform also means that pay platforms are not a good
substitute when looking at services whose value is skewed towards those in
society who need more support.
3
Source: Screen Digest (2007)
4Digital Dividend Review: Directgov Response, March 20th 2007
Directgov believes Digital Terrestrial Television, as the only universal and free
to air platform of the future, needs to showcase a broad range of material,
including content which has a strong business case in terms of social value,
but no commercial model.
A market approach to social value spectrum allocation
We believe that it is possible to extend Ofcom’s market-led approach to deal
with the potential for market failure described in this response.
One option would be to a proportion of the spectrum in Ofcom’s proposed
auction for non-commercial but socially valuable uses. This could either mean
ring-fenced spectrum being auctioned separately, or as part of each lot, with
an obligation on successful bidders to sub-let capacity to non-commercial
operators through a form of competitive bidding process.
As an example, a lot that was bought for use as a television multiplex might
come with a restriction that some capacity (both for video and data) were ring-
fenced for non-commercial use.
This capacity would be auctioned by the multiplex operator who had
successfully acquired this spectrum, but only amongst non-commercial users
who can demonstrate clear social value. This auction could be governed
entirely by price, or by a combination of price and ability to demonstrate
genuine social value. There are emerging models for establishing social value
such as the BBC Public Value Test that could be adapted to this purpose. To
ensure a level playing field, these auctions may need to exclude mainstream
broadcasters. We anticipate that the available capacity may either be
allocated to one use or further subdivided into day parts to accommodate a
number of users. A similar process would apply to lots bought for other uses
such as mobile TV.
We accept Ofcom’s point that in the past, specific allocations of spectrum
have led to inefficiency with organisations effectively ‘warehousing‘ capacity
that they have no current use for, but do not wish to surrender. Our proposal
would be that social value users would have to regularly demonstrate that
they were using the capacity and delivering the social value that their original
bid set out. And, if a spectrum operator is able to demonstrate that there are
no potential social value demands for the ring fenced capacity then this could
be resold to commercial users. Licences could be issued for a fixed period,
after which time, its use could be re-assessed, thereby creating the
opportunity for new social value entrants to enter the marketplace and not be
locked out for long periods by earlier services.
One of the positive effects of our proposal will be, we believe, development of
a new market in social uses for this spectrum. Our informal conversations with
other potential users suggest that there are many highly valuable non-
commercial services that might develop if fairly priced access were available.
The existence of a market-based way of allocating spectrum to these users
would encourage socially valuable usage and efficient allocation of a limited
5Digital Dividend Review: Directgov Response, March 20th 2007
quantity of capacity. This outcome would fit well with Ofcom’s objectives for
development of this spectrum.
Summary
Whilst Directgov welcomes Ofcom’s market-based approach, we believe that,
implemented in its purest form, it will perpetuate a new form of market failure.
Digital Terrestrial Television spectrum is particularly sought after precisely
because broadband and satellite do not offer direct substitutes. For social
purposes, Freeview is even more important because it reaches those who
cannot afford broadband or pay TV subscriptions.
By adding an obligation on future spectrum licensees to auction a small
proportion of their spectrum amongst social value users, Ofcom can ensure
an allocation of spectrum in line with its stated aims of maximising the value
that society receives from use of this spectrum in a way that encourages most
efficient use of spectrum, and avoid the claim that its objective is simply to
maximise revenue. At the same time it will ensure a broader range of services
for consumers on the current and future platforms that make use of the
spectrum.
Our suggested approach would overcome Ofcom’s stated objections to
picking preferred uses or users (distortion of incentives, reduced flexibility,
risk of distorting competition, risk of making incorrect choices) whilst also
ensuring public and voluntary organisations continue to play an active and
valuable role.
In addition to Directgov, there is already an established community of
organisations creating multi-media content with clear social value: DfES’s
Teachers TV, the Community Channel, NHS Direct’s interactive service, and
DigiTV’s local authority based services. A social value spectrum allocation
would both enable and encourage this valuable sector.
A social value spectrum allocation would allow a free market to prosper, with
all the associated benefits, whilst also allowing services to flourish which have
a strong business case in terms of social value, but no commercial model.
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