The document discusses the viability of the Digital One radio multiplex in the UK. It notes that Channel 4's decision not to pursue radio plans has left many slots on the multiplex unused, threatening its commercial viability. It suggests the multiplex may need to be transferred to the BBC or Arqiva to ensure its continued operation. It also argues that subsidy will likely be needed in the short term to boost adoption of digital radio and ensure the multiplex's survival, possibly through redirecting funds from the BBC's digital television switchover budget.

1. THE DIGITAL ONE RADIO
MULTIPLEX: DESPERATELY
SEEKING SUBSIDY
GRANT GODDARD
22 October 2008

2. • Following Channel 4’s decision not to proceed with its plans for
digital radio, there is a glut of unused capacity on the existing
national digital commercial radio multiplex (owned by Digital One)
which threatens its commercial viability
• For the DAB platform to retain any chance of survival, the continued
existence of this national multiplex might have to be assured by
transfer of control to either the transmission company Arqiva or to
the BBC, who could operate it under the ‘Freeview’ TV model
• Subsidy of the DAB platform will prove necessary in the short-term to
ensure its continued take-up, possibly by diverting part of any
residual that arises from the BBC’s ring-fenced £603 million fund
assigned to digital television switchover
Channel 4’s decision in October 2008 not to proceed with its radio plans
(Channel 4 radio: six feet under [2008-97e]) has precipitated a domino
effect on the rest of the radio industry and has had the most significant impact
on Digital One, its erstwhile competitor. Digital One Limited was awarded a
12-year licence in 1998 to launch the first national commercial radio digital
multiplex, with capacity for 10 radio services, seven of which were to be
unique to the digital platform. The shareholders in Digital One are Global
Radio (63%), the UK’s largest commercial radio group, and Arqiva (37%), the
transmission provider. After nine years on-air, the Digital One multiplex is still
not generating an operating profit because the majority of its available slots
are unused. This is the opposite of the situation in digital television, where
slots on Freeview attain high prices at auction.
Digital One pays £8 million per annum to Arqiva for the network of 134
transmitters across mainland UK that comprises the multiplex. Additional
costs (staff, offices) brought the cost of operating the multiplex up to £9.6
million in FY2006/07. Broadcast legislation requires the multiplex to carry
simulcasts of the three national commercial analogue services. Two of these
stations, TalkSport and Absolute Radio, together pay around £4 million per
annum to Digital One for carriage. The third station, Classic FM, is owned by
Global Radio. At present, the only other station carried on the Digital One
multiplex is Planet Rock, formerly owned by Global Radio’s forerunner GCap
Media, but sold to an entrepreneur in June 2008. Planet Rock’s new owner
signed a “long-term deal” for carriage on Digital One in October 2008.
With six out of 10 of the channels on Digital One presently unoccupied, Digital
One’s majority shareholder Global Radio is now forced to consider the reality
that the multiplex will never generate an operating profit during the remaining
life of its licence, which expires in November 2011. Channel 4’s decision to
scrap its radio plans brought to an abrupt end a protracted period of
negotiation with Digital One in which the broadcaster would have become a
shareholder in Digital One and/or leased space on the multiplex for at least
one of its planned radio channels. Now that the Channel 4 radio project is no
longer alive, Global Radio is faced with the prospect of no additional revenue

3. source for the national multiplex from a commercial radio sector that is
financially stressed by falling audiences and declining advertising revenues
(The second national digital radio multiplex [2008-92e]).
Global Radio quickly needs to examine solutions for Digital One that will
lessen the burden of the multiplex’s ongoing operating loss. These might
include:
The Hazlitt solution
In February 2008, during her brief tenure as Chief Executive of GCap Media,
Fru Hazlitt had convinced the Board to sell the company’s stake in Digital One
to its partner Arqiva for exactly £1. In return, Arqiva had agreed to release
GCap from the future financial obligations of its Digital One transmission
contracts (with the exception of Classic FM which is required to simulcast on
the multiplex). At the time, this action would have produced for GCap a gross
saving of £4.7 million in 2008/9. However, the plan was never executed
because of Global Radio’s subsequent (and successful) bid for GCap.
The proposed sale of Digital One to Arqiva could be resuscitated, although the
savings for Global Radio would be less than £4.7 million per annum, due to
GCap’s divestment of Planet Rock and the closure of its remaining digital
stations since February 2008. A discounted tariff for the simulcast of Classic
FM station might be negotiated with Arqiva as part of the divestment. What
would Arqiva gain from such a deal? A sustained revenue stream because, if
Global were to simply hand back the Digital One licence to Ofcom, the
multiplex would close and Arqiva would forego the carriage fees from the
three national commercial stations and Planet Rock between now and 2011,
probably worth more than £15 million in total.
For publicly quoted GCap Media, the Hazlitt solution was a means to improve
the company’s share price at a time of shareholder exasperation. For privately
held Global Radio, the Hazlitt solution would require a significant write down
of the balance sheet valuation of its stake in Digital One, making the sale price
unlikely to be as low as £1. On the other hand, divestment of Digital One
would assist Global’s immediate cashflow, an important factor at a time when
debt is becoming significantly more expensive to service.
The Digital One multiplex would then operate similarly to the two Freeview
digital television multiplexes owned by National Grid Wireless, whereby the
transmission company owns the transmitter network and leases space for
channels to all comers (commercial operators or the BBC) at a cost
determined by supply and demand. This would help obviate the previous
situation where Digital One had selectively chosen to exclude carriage of
content from companies that competed with the offerings of its major
shareholder. It could also bring down the carriage cost in the short term for
potential content providers.
Ironically, this application of the ‘Freeview principle’ (whereby the platform
owner has no interest in offering its own content) to digital radio was proposed

4. in the licence bid made by National Grid Wireless to Ofcom in 2007 for the
second national digital radio multiplex. Ofcom had rejected this application at
the time in favour of Channel 4’s application, possibly because it offered more
‘sexy’ content plans.
The BBC solution
In parallel with Digital One, the BBC operates its own national DAB multiplex,
paying £6 million per annum to National Grid Wireless for a network of 103
transmitters. Unlike the Digital One multiplex, the BBC multiplex is full to
bursting point, carrying simulcasts of the BBC’s five national networks, the
BBC World Service and the five digital-only stations the BBC launched in
2002. The BBC had quietly hoped to be gifted a further national radio
multiplex but, instead, the government decided that Ofcom should offer the
multiplex to the commercial sector, and Channel 4 won the ‘beauty contest’.
As a result, allocation of the BBC’s existing digital spectrum is under internal
pressure and results in consumer complaints about the audio quality of some
of its channels (quality is compromised as a result of squeezing 11 stations,
one part-time, onto one multiplex). The current BBC Licence Fee settlement,
running from 2007 to 2013, is unlikely to directly provide sufficient funds for
the BBC to acquire the majority interest in the Digital One multiplex from
Global Radio, and to take on the £8 million per annum transmission contract
with Arqiva that runs until 2011.
One potential source of funds for the BBC’s increased financial commitment to
the DAB platform is the ‘Macquarie windfall’ that resulted from the acquisition
of National Grid Wireless by Macquarie Bank, which already owned rival
Arqiva. This transaction was approved by the Competition Commission in
March 2008 on the basis of behavioural remedies that included an immediate
17% discount on extant contracts of both companies’ radio transmission
customers. Whilst this discount is insufficient to negate Digital One’s operating
loss, it does provide the BBC with a saving of £6.8 million per annum going
forward on its total £40 million per annum radio transmission bill, an amount
which had not been anticipated within the current Licence Fee settlement.
It might also be possible to source additional funding for the BBC to acquire
the majority interest in the Digital One multiplex from the Digital Switchover
Help Scheme, the details of which were agreed between the BBC and the
government in May 2007. The Scheme provides the BBC with a ring-fenced
sum from Licence Fee revenues of £603 million over six years, starting in
2007, specifically to assist with consumer migration from analogue to digital
television. It is widely expected that this sum will be under-subscribed, in
which case the legislation states that “decisions on how this underspend is
dealt with will be taken nearer the time that any underspend becomes
apparent”.
In April 2008, Ofcom suggested that excess funds from the Scheme could be
used to fund public service content on television outside of the BBC, an idea
rejected outright by Sir Michael Lyons, Chairman of the BBC Trust, who
responded that “the sad truth about the ‘excess’ Licence Fee is that it doesn’t

5. exist”. However, within the same speech, Lyons went on to argue that
Ofcom’s consultation on public service broadcasting should be extended to
include the DAB radio platform because “there’s a real audience demand, for
example, to give every radio listener in Britain the high quality [DAB] reception
city-dwellers take for granted”. Lyons suggested other digital policies for the
BBC to pursue and proposed “a proper national debate to establish the
priorities and – if the public’s money is required to cover the cost – ensure the
public have a say in how much and on what”.
In September 2008, market research commissioned by Ofcom found that
“increasing the number of people who can receive DAB digital radio across
the UK” polled third in a list of nine options offered to respondents, who were
asked about use of the notional £6 per household payment within the Licence
Fee presently allocated to the Digital Switchover Help Scheme once it expires
in 2013. The two options voted ahead of it were: to reduce the cost of the
Licence Fee; and to increase broadband access.
The BBC has pointed to the ‘sixth purpose’ of the Corporation as defined in its
current Charter – “helping to deliver to the public the benefit of emerging
communications technologies and services” – as its intended use of any
apparent surplus from the £603 million switchover fund. It argued that “the
general purpose which these investments support has been a core part of the
BBC’s mission for over eighty years and will not end in 2012” because, “with
DAB requiring further support [and] with the ‘digital divide’ set on current
trends to remain well beyond 2012, it is too soon to talk of taking investment
out of promoting digital Britain”.
However, funds to develop DAB take-up after 2012 would arrive too late to
solve the current crisis. What is needed, now, is an extension of the scope of
the Digital Switchover Help Scheme to include a provision for DAB radio. This
would require an amendment to legislation, but such a task is not impossible
as the original Scheme from May 2007 has already been revised once by the
Department for Culture, Media & Sport in April 2008. The ‘hit list’ of DAB
issues that require urgent funding to drive take-up of the platform could
include:
• transfer of the Digital One multiplex to BBC control, and provision for its
overheads until the licence expires in 2011
• increases in the transmission powers of the existing BBC and Digital One
national multiplexes to improve indoor DAB reception
• a ‘new build’ programme of low power, fill-in transmitters in urban areas for
the BBC and Digital One national multiplexes to improve reception in built-
up areas (such a programme has already been completed for Digital One
in London)
• extension of the BBC and Digital One multiplexes to a greater proportion of
the UK population (currently the BBC serves 86%, while Digital One
serves 90%).
Lord Carter’s appointment in October 2008 as Minister for Communications,
Technology & Broadcasting could lead to such an agenda being set for the
near future, as his brief includes “identifying barriers to wider investment and

6. development of digital radio platforms, and drawing lessons from the current
digital switchover television programme”. Asked about the estimated £130 to
£250 million residue from the Scheme, Culture Minister Barbara Follett told
the Commons that "if there is [some excess], the government has agreed to
discuss this with the BBC Trust first and look at innovative and useful ways to
use that money".
Conclusion
Ultimately, the BBC needs to ensure the continuation of the Digital One
multiplex in order to justify expenditure on its own digital radio ambitions. In
addition to the £6 million per annum transmission cost of its national multiplex,
the BBC pays commercial radio companies £3.6 million per annum to carry its
local BBC stations on their local multiplexes, and the content costs of the
BBC’s five digital-only stations add a further £30.4 million per annum. It could
prove hard for the BBC to publicly justify this continued expenditure of £40
million per annum if consumer take-up of the DAB platform were not to exhibit
further growth.
In 2002, the BBC had decided to launch five, relatively niche, digital stations
on the assumption that the commercial sector would offer more mainstream
digital offerings on its own national platform. Without Digital One, there would
be no national platform for non-BBC digital radio content. The failure of the
commercial sector in this respect would otherwise leave the BBC nursing
digital stations that are unlikely ever to attain mass market status, thus
condemning the DAB platform to be of minor interest to consumers for the
foreseeable future.
The official response of Tim Davie, the BBC’s new Director of Audio & Music,
to Channel 4’s decision to withdraw from radio was: "Today's announcement
is disappointing news for UK radio as plurality of services is very much in the
interest of all listeners … Going forward, the BBC is committed to work with
the Digital Radio Working Group and all other parties to lead the growth of
digital radio". Davie will be keen to avoid another ITV Digital ‘fiasco’ and will
be reflecting on his role as director of both Freeview and Digital UK, the
organisations charged with salvaging digital switchover … for television.
[First published by Enders Analysis as report 2008-100e.]
© 2008 Grant Goddard
Published by Radio Books
http://www.radiobooks.org
http://www.grantgoddard.co.uk