EBU • UER - Technical Review

No. 292 (October 2002)

Should broadcasters own their transmitter networks?

The broadcasting "value chain" can be simplified into three distinct stages:

content creation;
programme scheduling and commissioning;
distribution to consumers.

In the early days of broadcasting, many broadcasters were vertically integrated and took full responsibility for all three stages. Today, the role of a "broadcaster" may be much more restricted: some are not involved at all in making programmes or in the transmission of services to consumers. Some commercial broadcasters confine themselves to the scheduling of programmes purchased from independent producers. Some have no substantial in-house production capacity, relying instead on services provided by facilities houses. Due to their public service obligations, EBU Members undertake much broader roles, usually concentrating their efforts on programme production. Many have excellent in-house orchestras which make valuable contributions to the cultural life of European countries. If the oft-repeated mantra "Content is King" is true in the digital era, broadcasters must maintain their role in content creation – and ensure that they can use their programme archives in innovative ways, far beyond their existing uses. Any broadcaster that narrows its role in the value chain to become, for example, a play-out centre, risks being marginalized in the future.

At the opposite end of the value chain, the position is much less clear. Is there any compelling reason why broadcasters should own their terrestrial transmitter networks? Some EBU Members have never owned their transmitter networks. Some have sold their transmitter networks in the last 10-15 years, whilst others continue to operate their own networks and see little reason for any change.

Despite this diversity of arrangements, there is a common complaint amongst EBU Members: along the lines of "We are paying too much for our transmitter networks". These complaints may be justified, particularly where the transmitters are owned and operated by state-run telecommunications providers. Such organizations have little or no incentive to operate efficiently or to provide high-quality services at reasonable prices to their customers. However, there is no reason to believe that broadcaster-owned transmitter networks are necessarily cheaper than those provided by external suppliers. In reality, internal operations may also be run inefficiently and thus be too expensive.

So how do broadcasters judge whether they are paying a fair price for transmission? One method has been to examine the costs, which tend to be dominated by capital expenditure and by costs of electricity and maintenance staff. Investment in modern equipment is often beneficial. Modern transmitters are much more efficient than their predecessors in terms of electricity consumption and, hence, are cheaper to run. Furthermore, their improved reliability can also help to control staff costs. The transition to digital broadcasting promises even greater benefits but, inevitably, there will be an increase in costs during the simulcast period when analogue and digital networks are run in parallel. This issue emphasizes the need for broadcasters to control the costs of transmission.

One of the problems is that broadcasters rarely have any freedom of choice of providers. The "obvious" answer is to promote competition between providers so that broadcasters can choose between two or more providers. Unfortunately, once a network of transmitters has been built, it is simply not possible for a broadcaster to change to another supplier – because the new supplier would have to build an entirely new network (involving large capital expenditure over several years, whilst solving difficult problems such as gaining frequency clearance and planning permission). In practice, the incumbent provider has a huge competitive advantage and is unlikely to be displaced by new entrants.

In the UK, there are two major transmission providers which compete vigorously for new business from broadcasters. However, such competition is constrained by the fact that each operator owns about 50% of the transmitter sites around the country, and that they lease facilities (e.g. masts and antennas) from each other. Recognizing that such competition is imperfect, the UK's regulatory bodies have instituted price-control mechanisms in the hope of ensuring that broadcasters are not over-charged.

In countries where there is a single provider, the situation is obviously much more difficult. Experience in related fields, such as telecommunications services, suggests that price regulation is a very blunt instrument. It is not easy for regulators to decide what constitutes a fair price for complex services – such as those depending on large historic capital investments and for which there is no directly comparable alternative. The operators have every reason to inflate their estimates of costs so that the regulators will allow prices to increase. If prices are constrained or forced down "too much" by the regulators, the operators may respond by reducing their investment in modernising their networks and by reducing the quality of their services. Even where broadcasters operate their own networks, it can be difficult for them to identify the true costs and determine whether they are operating efficiently. Such problems are compounded when broadcasters have to negotiate with a separate commercial company.

Even so, some broadcasters have sold their transmission networks in recent years. It is worth examining the reasons for such actions. In some cases, broadcasters have been "persuaded" by their Governments to do so, but others have done so willingly. With the benefit of hindsight, we can see that the results have been mixed. Some broadcasters have been disturbed to see that their costs have increased – perhaps with only minor increases on existing services (because the prices were set as part of the negotiations for the sale of the network), but with much bigger increases for new services (which could not be accurately foreseen at the time of the sale). The operators rightly point out that their primary objective is to act in the interests of their shareholders by maximizing profits. As many transmission services require substantial capital investment, the operators insist that broadcasters must sign long-term contracts. As the new operators have to take significant risks and have to pay taxes on any profits, it is not surprising that prices tend to go up.

Some broadcasters who have sold their transmission networks have been allowed to keep the money raised by the sale. Many broadcasters are attracted by the possibility of this one-off injection of cash, but it must be offset against higher annual charges. One analogy might be that of selling your privately-owned car to a company that would lease it back to you. The leasing company would not be interested in doing this unless it could make a profit – and, by definition, its profit is your loss!

In most countries, analogue terrestrial transmission has historically been the dominant form of delivery for radio and TV services. But this picture is changing rapidly: about 50% of homes in EU countries are no longer dependent on terrestrial transmissions. For example, in Belgium and the Netherlands, cable TV reaches more than 90% of homes. In Germany, the mixture is more complicated: cable TV currently reaches about 55% of homes, whilst satellite services reach about 35%. This implies that only about 10% of German homes are dependent on terrestrial TV services, but the evidence suggests that about 35% of homes still use terrestrial services as a supplement to cable or satellite services (e.g. for reception on second TV sets). At the other extreme, 97% of homes in Greece are still dependent on terrestrial TV – as are 89% in Italy and 80% in Spain.

It can be argued that, in the future, there will be a multitude of digital delivery systems and, hence, delivery of "bits" could become a commodity. In such circumstances, broadcasters should perhaps sell their transmitter networks so that they can concentrate on their core activities – rather than being distracted by ownership of just one of the delivery methods. The conventional wisdom has been that if the services to be provided by an external provider can be specified in a legally-enforceable contract, there is no need for broadcasters to own their transmission networks. On the other hand, broadcasters are now becoming increasingly anxious about third parties being able to control key elements (or gateways) of the broadcasting chain, such as conditional access and subscriber management systems. Although it is obvious that various potential gatekeepers want to control the business of digital TV, why has so little attention been paid to the prospect of broadcasters losing control over terrestrial transmission?

As broadcasters cannot achieve control of satellite or cable delivery mechanisms, it is occasionally argued that there is no need for them to control terrestrial delivery. The response to that argument must be that control of, at least, one important delivery system helps broadcasters to take a strong position in negotiations with potential gatekeepers.

So what position should EBU Members take on the issue of ownership of transmission networks? No universal recommendation is appropriate as different broadcasters are starting from very different positions. Those who have never owned or have sold their networks have little flexibility, apart from complaining to regulators if they feel that they are being over-charged. Those who still own their networks should try to maintain control (or partial control) of them – so that they can limit their continuing transmission costs and, more importantly, can ensure that the strategic direction of the network provider is closely aligned with their own broadcasting needs.

Philip Laven
Director
EBU Technical Department