Monday, 19 July 2010

Cost/benefit analysis of DAB radio: Murdoch rushes in where governments fear to tread

Governments have had plenty of practice, over many years, of hiding reports from the electorate. In some cases, they might justify this as a matter of national security or military expedience. However, it is hard to understand how the UK government thought it could justify hiding from the public a cost/benefit analysis of digital radio switchover it had commissioned and then, a year later, have believed the matter had been successfully buried. But so it was, until the House of Lords Communications Committee intervened in early 2010.

On 6 February 2009, PricewaterhouseCoopers [PWC] delivered a 91-page report entitled ‘Cost Benefit Analysis of Digital Radio Migration’ to Ofcom. It contained a number of serious reservations that any benefits would arise from switchover to DAB radio, even by the year 2030:

“The results suggest that there are relatively few up-sides to the estimates, and several significant downside risks. … The results suggest that there is a very long pay-back from the Digital Radio Working Group [DRWG] policy ‘investment’ – the Net Present Value [NPV] turns positive after 2026. This result assumes that the existing multiplex licences are extended to 2030, as per the DRWG recommendations. Without the licence extension or any other policy instruments that provide clarity on the long term future of commercial radio, the industry and consumers may fail to see the benefits of digital radio over the longer term. Our analysis suggests that the NPV is negative should either of these two proposals not be implemented.” [emphasis added]

Since then, parliamentary policy has failed to provide “clarity on the long term future of commercial radio,” as evidenced by last week’s wholly ambivalent government statement about digital radio switchover. As a result, just as PWC predicted, industry and consumers increasingly “fail to see the benefits of digital radio over the longer term.”

The PWC report, and its verdict that digital radio switchover offers almost no benefits, remained hidden from public view from February until November 2009, when an appendix to the government’s Digital Economy Bill mentioned it casually. That citation raised questions: what was this PWC report, and why could not the public see it?

When the House of Lords Select Committee on Communications convened in January 2010 to consider the digital switchover issue, it asked those same questions of the Ofcom officers it invited to present evidence:

Baroness McIntosh of Hudnall: We understand that you commissioned a report from PWC last year into the costs and benefits of digital switchover in radio, but you didn’t publish it. We know, therefore, what we have learned from the Department for Culture, Media & Sport about what it said. It appears that it found, for example, that the benefits could – and I emphasise the word “could” – outweigh the costs by £437 million after 2026, but that conclusion is hedged about with quite a lot of caveats to do with what would have to happen in order for that good outcome to eventuate, and that if those things didn’t happen, then quite quickly you would get into a position where the costs would outweigh the benefits. Can you tell us a bit about that report? In particular, can you tell us why you haven’t published it? Do you think that, given what it appears to say – I choose my words carefully – about the constraints on potential for benefit, that it should have been available to inform the Government’s digital policy? ….. [edited]

Mr Peter Davies [Director of Radio Policy & Broadcast Licensing, Ofcom]: We were asked to commission it by the Government. We then commissioned it from PWC with a lot of input from various government departments and then submitted it to the Secretary of State.

Chairman: So you decided not to publish it.

Mr Stewart Purvis [Partner for Content & Standards, Ofcom]: …. [edited] On this particular occasion, it was decided in conjunction with the Department that work would be sent to the Department. Perhaps the most important thing is for Peter to respond to your characterisation of the work, but, in a sense, we have not hidden the piece of work. Indeed, I think it is now available to you. Is that right?

Baroness McIntosh of Hudnall: In, as they say, a redacted form.

Chairman: Just to be absolutely clear, the Department asked you to commission the work from PWC. Is that what you are saying?

Mr Purvis: They asked us to commission the work. Did they ask us specifically from PWC?

Mr Davies: Not specifically from PWC.

Chairman: The Department said to Ofcom, “Ofcom, you go and commission this particular work.” Is that the position?

Mr Davies: Yes.

Chairman: You then got the work which then came back to you and then you sent it to the Government and the Government said, “We’re not going to publish this in full.”

Mr Davies: I think they have certainly made it available to various groups. I think consumer groups have had it for some time.

Chairman: Fine. There will be no problem, therefore, in this Committee having the full report. …. [edited]

Baroness McIntosh of Hudnall: The thing that is slightly troubling – perhaps only to me, but a bit – is that when you see what appears to be evidence that the costs and benefits are, let’s say, finely balanced, or could be, that the drive towards digital migration, one might think, was driven more by the technology than by the needs either of the broadcasters or the consumers.

The Committee’s displeasure with Ofcom and the government was evident both in this exchange and in its subsequent report on digital switchover, published in March 2010, which stated:

“We strongly regret that the cost benefit analysis carried out by PricewaterhouseCoopers was not published at the time it was delivered to Ofcom and the Department for Culture, Media & Sport in February 2009.”

The government’s response to the Committee’s statement, published in June 2010, was:

“The Cost Benefit Analysis produced by PricewaterhouseCoopers, to accompany the work of the Digital Radio Working Group, was widely distributed amongst broadcasters and consumer representatives. However, there were technical difficulties which prevented the initial publication of the report on the DCMS website; these were rectified and the report published in February 2010.”

“Technical difficulties” for a whole year? As excuses go, this really takes the biscuit. It seems unlikely that the PWC report would ever have been made public, if not for the intervention of the House of Lords Communications Committee in January 2010 (first publication of the report’s findings was in this blog a few days later).

The PWC report did not offer the government the support for its digital radio switchover strategy that it had anticipated, so now it has to commission a further cost/benefit analysis which it hopes will produce a more favourable outcome. Is the government in a hurry to complete another study evaluating the supposed benefits of digital radio switchover? Hardly, judging by the evidence.

In June 2009, the government’s Digital Britain report had promised:

“We will conduct a full Impact Assessment, including a Cost/Benefit Analysis of Digital Radio Upgrade.”

In January 2010, Ofcom’s Peter Davies had offered evidence to the House of Lords Communications Committee:

Baroness McIntosh of Hudnall: What about your own impact assessment?

Mr Davies: We haven’t done an impact assessment yet.

Baroness McIntosh of Hudnall: But you have been asked to – correct?

Mr Davies: At some point in the future. I think the Digital Britain report said that we would be asked to do one, but we haven’t been asked to do one yet. Obviously we would need to do that and we would need a much fuller cost-benefit analysis before any final decision was taken.

Most recently, in June 2010, the government stated:

“We agree that a full impact assessment is an essential part of informing the Government’s decision on whether and when to move from a primarily analogue to a digital radio landscape. Work has already begun to collect the evidence needed to support an impact assessment and analysis should begin shortly.” [emphasis added]

Why bother with yet another report at this late hour in DAB’s history? Someone else has already done the sums. News International has just run its sliderule over the idea of launching a national digital radio station ‘SunTalk’ (a brand extension of its national daily newspaper ‘The Sun’) on the DAB platform. Its result was: DAB radio is not a viable commercial platform.

According to The Guardian: “News International management were considering extending the [SunTalk] station's reach by launching it nationally on DAB digital radio. But it is understood they baulked at the extra cost.”

If Murdoch cannot see a way to make a profit from a broadcast platform that is crying out for compelling content, then how exactly does any other content owner think it can make a financial return from DAB radio?

It’s the platforms Rupert Murdoch rejects ….

1 comment:

Anonymous said...

An interesting article. I agree that the introduction of DAB is similar to the launch of VHF-FM radio.

One point I disagree with however is the inference that because "Sun Talk" decided not to launch on DAB the platform is uneconomic.

I suspect that Sun readers are under represented in DAB listeners compared to the proportion in the general population.

Lots more content, broadcast at adequate bit rates with the UK devided into, perhaps 6 or 8 different regions will make the platform start to work. Ofcom making it advantageous to the multiplex operator to create such networks and regulation to create distinct content is a way forward.

Perhaps removing some AM frequencies from what used to be "local" radio before a generic Gold took over so services had limited coverage AM and wider coverage DAB might help.

Also using a population weighted approach so that there were, say 3 more multiplexes in London would help.