National Audit Office review:The BBC’s investment in Freeview

Response from the BBC’s Board of Governors

The National Audit Office (NAO) review of the BBC’s investment in Freeview was the first external study to be undertaken following an agreement in 2003 between Government and the BBC to evolve the BBC Governors’ overview of value for money into a programme of reviews.

The overall approach of the reviews has been determined by the BBC’s Audit Committee, composed exclusively of Governors, on behalf of the Board of Governors. A key constituent of the programme is the appointment of external agencies, including the NAO, to undertake certain topics for review within the programme. A programme of six reviews until the end of the current Charter has been agreed between the BBC’s Audit Committee and the NAO’s Comptroller and Auditor General.

The NAO’s review of the BBC’s investment in Freeview was undertaken between January and May 2004. In summary the report concluded that “the BBC had clear and sound reasons for investing in Freeview and that the BBC contributed significantly to the quick and successful launch” in October 2002. The BBC welcomes this conclusion.

A successful launch within a tight timescale was a crucial objective for Freeview. It enabled the BBC to offer subscription-free access to all its digital television and radio services, while rescuing the ailing Digital Terrestrial Television (DTT) platform. The NAO report states that, since the launch of Freeview, take-up of digital terrestrial television has significantly exceeded the BBC’s projections.

Freeview is now watched on first sets in over 3.5 million households compared to an estimated 300,000 households receiving BBC digital channels on a free-to-view basis in 2001.This growth demonstrates a previously unmet demand among consumers for non-subscription digital television. Indeed Freeview is now the key driver in increasing overall digital take-up, which has increased from 38% in November 2002, when Freeview was launched, to 53% of households (13 million homes) in March 2004.

The BBC therefore welcomes:

• the NAO’s recognition of the progress the BBC has made in driving digital take-up via DTT with the provision of a free-to-view service, which in turn supports the Government’s targets for digital switchover
  
• the NAO’s recognition of the steps taken by the BBC to increase Freeview coverage, and that full coverage now depends on the future actions taken by the Government and other industry parties, as outlined in the BBC’s report to Government, Progress Towards Achieving Digital Switchover
  
• the NAO’s recognition of the BBC’s efforts to make its digital services more readily available to those who cannot receive Freeview, for example by broadcasting unencrypted on satellite since July 2003
  

Actions taken to address the NAO’s recommendations

The NAO makes a number of observations and recommendations within its report. While the resolution of some of these areas is outside the BBC’s control and includes dependencies with other external parties, the BBC is already taking active steps to address these recommendations to ensure wide access to the BBC’s digital services.

Specifically the BBC would like to highlight the following actions being taken as reported against each of the BBC’s stated objectives for its involvement in Freeview. The response focuses in particular on the objectives which the NAO have judged partial rather than complete successes.

Objective:

Secure digital terrestrial television

Succeeded

The BBC welcomes the NAO’s conclusion that the BBC has succeeded with this objective.The BBC’s investment in Freeview sought to protect the DTT distribution platform; to restore the overall credibility of digital television amongst consumers; and most importantly to increase the availability of the BBC’s digital services, for free, to as many licence payers as possible.

Objective:

Detailed market research has regularly identified that a significant proportion of analogue households are not prepared to pay a subscription in order to convert to digital. On that basis the concept of a wholly free-to-view platform, placing the BBC’s digital services at the heart of the proposition, was developed in 2001/2.

When ITV Digital failed, an opportunity to deliver this strategy presented itself and the concept of Freeview evolved. Initial BBC take-up projections of 2.1 million households receiving free-to-view services via DTT by March 2004 were far exceeded – with the actual figure amounting to 3.4 million in the same time.

Since the launch of Freeview, the BBC has continued to look at a range of ways of making its services free-to-view through other distribution mechanisms and platforms. For example, the BBC now broadcasts unencrypted on satellite and supports the development of a free-to-view satellite service offering consumers across the UK, and specifically those out of Freeview coverage, the chance to receive the BBC’s digital services.

Objective:

Launch Freeview according to the planned timetable

Succeeded

The BBC ensured that the bid for Freeview was submitted within the ITC’s demanding timescale of less than six weeks by putting together its strategy, marketing and investment plans in a clear and concise manner to meet the deadline.The BBC therefore welcomes the NAO’s conclusion that it acted pragmatically by fast-tracking decision-making within the organisation. The BBC approvals process was accelerated without diminishing its rigour. The BBC rose to the ITC’s challenge by proving it could act in a nimble and professional manner where necessary, and the quality of the BBC’s bid was recognised by the ITC in awarding the DTT licence to launch Freeview.

Objective:

Steps are also being taken, through increasingly successful and targeted marketing campaigns, to address customer confusion among analogue audiences over Freeview. Specifically, digital on-air trails will continue to emphasise that up to 30 free digital channels can be received following a one-off payment for equipment. The introduction of dual trailing, whereby the BBC broadcasts different trails simultaneously in analogue and digital homes, means that the power of these ‘how to get’ campaigns will be maximised among analogue audiences, while not alienating digital viewers who already benefit.The BBC has been piloting dual trailing since May 2004. Subject to results, it is expected that the initiative will be rolled out all day and every day of next year.

In order to increase the number and distribution of those yet to convert to digital, the BBC is working hard to make its digital services more readily available to those who cannot currently receive Freeview.

Since July 2003, households have been able to receive the BBC’s digital services unencrypted on digital satellite.This means that viewers can access all of the BBC’s digital channels and radio stations via satellite receiving equipment, irrespective of whether a consumer subscribes to a pay satellite service or not. Furthermore, the BBC recognises the need to offer those viewers living outside Freeview coverage areas, and those within coverage but requiring an aerial upgrade, the option of a consumer-friendly free-to-view satellite package.

To that end the BBC is keen to draw on its expertise, as demonstrated by Freeview, in forming successful industry alliances to establish a proposition and offer consumers a free-to-view alternative as soon as practicable.

On behalf of the BBC, the Governors thank the NAO for this value for money study.

June 2004

Increase awareness of subscription-free access to BBC digital channels

Partial success

The BBC’s campaigns to promote its digital channels across Freeview, satellite and cable have been a significant driver behind the consumer response to Freeview. Ongoing market research is being undertaken which ensures the BBC fully understands the motivations of those yet to enter the digital world.

The BBC will be continuing to promote the BBC digital channels and services through Freeview, cable and satellite throughout 2004, and has a new dedicated on-air campaign planned for autumn 2004. This campaign will direct viewers towards the BBC digital website and telephone number for further information on digital.

Ensure that people can receive BBC digital services without paying a subscription fee

Partial success

Prior to the launch of Freeview, there were very limited options for making the BBC’s digital channels available to the consumer without charging a subscription. The BBC is committed to universality and to trying to make the BBC’s services free at the point of use wherever possible.

The BBC's investment in Freeview

REVIEW BY THE COMPTROLLER AND AUDITOR GENERAL Presented to the BBC Governors' Audit Committee 28 May 2004

CONTENTS

Preface

1

Background to the BBC's investment 2 in Freeview

Analysis, findings and recommendations 6

Chronology of key events

10

PART 1

The BBC's decision to invest in Freeview 11

PART 2

The creation of the joint venture and 22 the launch of Freeview

The National Audit Office scrutinises public spending on behalf of Parliament.

The Comptroller and Auditor General, Sir John Bourn, is an Officer of the House of Commons. He is the head of the National Audit Office, which employs some 800 staff. He, and the National Audit Office, are totally independent of Government. He certifies the accounts of all Government departments and a wide range of other public sector bodies; and he has statutory authority to report to Parliament on the economy, efficiency and effectiveness with which departments and other bodies have used their resources.

Our work saves the taxpayer millions of pounds every year. At least £8 for every £1 spent running the Office.

The National Audit Office team consisted of:

Keith Hawkswell, Keith Davis, Richard Gauld and Mark Simpson.

PREFACE

This is the first National Audit Office review to be produced under an arrangement agreed between the Government and the BBC in 2003, in the context of Parliament's consideration of the Communications Bill. The arrangement provided for the BBC Governors' Audit Committee to decide on a programme of value for money reviews following discussion with the Comptroller and Auditor General, and to allocate some of those reviews to the National Audit Office. The programme of reviews covers the period up to the end of 2006 when the BBC's current Royal Charter expires.

This review examines the BBC's decision to invest in Freeview, looks at how Freeview is operating, and assesses what impact the BBC's investment has made so far.

The report is structured as follows:

• Background to the BBC's investment in Freeview
  
• Analysis, findings and recommendations
  
• Main report
  
• Methodology
  
• Glossary
  

The BBC's investment in Freeview

1

BACKGROUND TO THE BBC'S INVESTMENT IN FREEVIEW

• The government is seeking to switch off analogue terrestrial television signals and to ensure that everyone who currently receives the public service channels (BBC 1, BBC 2, ITV, Channel 4/S4C and Five) in analogue can receive them in digital. The government expects that this digital 'switchover' could start in 2006 and be completed in 2010.
  
• The BBC is obliged to promote digital television as part of an enhanced licence fee settlement. It broadcasts eight television services and ten radio stations on digital satellite, digital cable and digital terrestrial (Figure 1).
  

• BBC research has indicated that a significant proportion of licence fee payers who do not have digital television might convert to digital if they could receive it subscription-free through their television aerial.
  
• Digital terrestrial television (digital through a television aerial) is spread across six digital 'multiplexes' (named 1, 2, A, B, C and D). Each multiplex consists of a frequency band in the radio spectrum which can be used to transmit several digital terrestrial television services. Multiplexes can also be used to transmit radio and data services such as Teletext.
  
• When digital terrestrial television was launched in the UK in 1998, the multiplex licences were held by four different organisations:
  

• Multiplexes B, C and D were readvertised in May 2002 after ITV digital, who held these three licences, went into administration.
  
• The BBC decided to make a linked bid with Crown Castle (a company involved in digital terrestrial transmission) for the three readvertised licences. The BBC was awarded Multiplex B and Crown Castle was awarded Multiplexes C and D.
  
• The BBC and Crown Castle worked with BSkyB to develop 'Freeview', the brand name for a package of subscription-free television and radio (including all the BBC's digital services) broadcast on digital terrestrial television. This collaboration led to the setting up of a joint venture company (Digital Television Services Limited), in which the three parties are equal shareholders, to provide marketing support for Freeview.
  
• Freeview was launched in October 2002.
  
• (The diagrams on pages 7 and 8 show what Freeview means to the licence fee payer and to the BBC.)
  

The BBC's investment in Freeview

3

What Freeview means to the licence fee payer

The BBC's investment in Freeview

4

Yes, but it depends on the condition of your aerial and where you live. You may have to upgrade your aerial at a cost of between £80 and £250

Source: National Audit Office

The BBC's digital services are also available on satellite and cable

What Freeview means to the BBC

What is Freeview?

Freeview is an opportunity for the BBC to offer licence fee payers subscription-free access to its digital channels

Why can't they receive these at present?

Most homes have analogue sets which cannot interpret digital signals.

A set-top box allows analogue TV sets to display digital channels

What is the cost to the BBC?

The cost is broadly split into:

Marketing

Operating Multiplex B

£1.25 million a year to Digital Television Services Ltd (the joint venture company which manages the Freeview website and call centre)

£1.5 million a year to BBC Technology Ltd for coding and multiplexing

£7.2 - £8 million a year to Crown Castle for transmission. Crown Castle is a shareholder in Digital Television Services Ltd, and also receives £12.1 million a year from the BBC for transmission of Multiplex 1

Source: National Audit Office

The BBC's investment in Freeview

5

ANALYSIS, FINDINGS AND RECOMMENDATIONS

The BBC's investment in Freeview

6

1

This includes £7.2 - £8.0 million of transmission costs which the BBC might have incurred independently of the Freeview project, as part of efforts to obtain more capacity.

• Drawing on BBC documentation and discussions with BBC staff, we identified four broad objectives that the BBC aimed to achieve through its investment in a new digital terrestrial service, Freeview. In the table below we set out our findings and an assessment of how successful the BBC has been so far in achieving each objective.

• Increasing its stake in digital terrestrial television fitted well with the BBC's objectives for digital services.
  
• If, when ITV Digital went into administration, the digital terrestrial television market had been weakened or ceased to exist, this would have been damaging to the BBC given the investment it had already made in digital terrestrial.
  
• The BBC adopted an accelerated approvals process in response to a demanding timetable. To ensure that a bid for additional digital terrestrial capacity was submitted to the Independent Television Commission by the required date, the BBC's Executive Committee did not request a single detailed written investment document for Freeview, as it would normally have done, but it did receive documents which identified the main costs and benefits of Freeview, the key risks and how they could be managed.
  
• The BBC judged that it would be a more attractive proposition for it to collaborate with other bidders, rather than bid alone and in potential competition with other consortia.
  

Objective:

Secure digital terrestrial television

Succeeded

• The BBC and its partners met a demanding timetable for launch.
  
• The joint venture was set up with safeguards for the BBC. While there are risks that the goals of the shareholders are less well-aligned than is desirable in a joint venture, the shareholders managed this risk by ensuring that any significant changes to the joint venture cannot be made without support from all three shareholders.
  
• The Freeview company quickly became operational and it is now dealing
  

Objective:

Launch Freeview according to the planned timetable

Succeeded

7

• Seventy-three per cent of households can now receive Freeview and almost one in two households can receive it through their existing aerial. Within this there are wide regional variations: in the BBC's North West region 93 per cent of households can receive Freeview but in the South East only 45 per cent can. The BBC has taken the action agreed in its bid to increase coverage and is working to provide subscription-free access to its digital services in areas where Freeview is available.
  
• Freeview has been a clear success so far in terms of take-up by consumers. Freeview is now watched in more than 3 million households. The BBC's campaigns to promote its digital channels, which have been designed to also promote the existence of Freeview, alongside satellite and cable, have been a big factor behind the consumer response to Freeview.
  
• Achievement of this objective depends on factors outside the BBC's control. Significant further increases in digital terrestrial coverage will only be achievable when switchover occurs.
  

Objective:

Increase awareness of subscription-free access to BBC digital channels

Partial Success

The BBC's investment in Freeview

8

• Almost three out of four people in the BBC's survey are now aware of the Freeview brand.
  
• The BBC's campaigns have not yet succeeded in significantly reducing consumer confusion about Freeview in non-digital households. While consumer take-up has been high, indicating that many have understood the concept, more than half of the remaining households that have not converted to digital believe that they have to pay a subscription in order to receive the BBC's digital services. The BBC is working to address this in its digital campaigns, and its evaluations show that more recent campaigns have been much more effective than earlier campaigns in getting the subscription-free message across to viewers.
  
• The BBC could provide clearer information to licence fee payers about why they may be unable to receive BBC digital services through Freeview. The BBC has helped develop a service which allows licence fee payers to use their postcode to check whether they can get Freeview. However, there is still confusion among licence fee payers about why Freeview, which is funded partly by the licence fee, is not available to a quarter of UK households.
  

• The main risks facing the BBC as its investment in Freeview moves forward are summarised in Figure 2 along with the action taken by the BBC to reduce them. It is important that the BBC manages these risks carefully to ensure the future of its investment is secure and that it delivers value for money.
  

2

The BBC's investment in Freeview

9

The BBC's investment in Freeview

10

THE BBC'S DECISION TO INVEST IN FREEVIEW

1

1.1 This part of the review examines what Freeview is and why the BBC invested in it. It covers:

• how well the investment fitted with the BBC's objectives for digital services; and
  
• whether the decision was properly considered by the BBC.
  

3 The status of the BBC

The BBC is a public corporation, established by Royal Charter. Many of its public obligations are set out in an Agreement between the Secretary of State for Culture, Media and Sport and the BBC. It is funded mainly by the television licence fee. The Government sets the licence fee which supports the BBC, and granted the BBC £2.6 billion in 2002/03.

• The Secretary of State for Culture, Media and Sport has some responsibilities which can be used to ensure that the BBC keeps to the terms of the Royal Charter and the Agreement.
  
• The BBC Governors are responsible for ensuring that the BBC meets all its statutory and other obligations (including those in the Charter and Agreement).
  
• Ofcom is responsible for regulating some aspects of BBC content and programme-making and has some regulatory responsibilities in respect of licences to operate digital television services. Such licences are needed only for services provided on a commercial basis by the BBC's subsidiaries. No licences are necessary for the services provided by the BBC itself.
  

Source: National Audit Office

Freeview is a digital terrestrial service

1.2 Digital television was launched in the UK in 1998 (Figure 4). The BBC broadcasts a number of digital services which can be received via a satellite dish, a roof-top television aerial (this is known as digital terrestrial television) or digital cable (see Figure 1 on page 2). The BBC provides all of its digital services to all distribution platforms without charge.

4 What is digital television?

Television and radio transmission in the UK has, until relatively recently, relied on analogue technology. Analogue transmission is based on sending pictures and sounds as a continuous electronic wave. Digital transmission uses binary code to send pictures and sounds as streams of zeros and ones. Digital code uses less space (or bandwidth) than analogue signals so several digital channels can fit into the bandwidth needed to transmit one analogue channel

Analogue data Digital data

01000101000 10100100011 00101100101 101100

Source: National Audit Office

The BBC's investment in Freeview

11

1

1.3 Freeview is the brand name for a package of subscription-free digital television and radio services (including the BBC's digital channels) which is available on digital terrestrial television. Digital terrestrial television has fewer channels and more limited interactive services than satellite or cable (Figure 5). Prior to Freeview, licence fee payers had only very limited opportunities to access the BBC's digital services without paying a subscription.

5

Key differences between digital terrestrial and the other main digital television platforms

• Digital terrestrial television can be easier to install than satellite or cable as it does not require a satellite dish or connection to a cable network.
  
• Digital terrestrial is available to more households than digital cable, but it does not offer the near universal coverage which satellite offers.
  
• Digital terrestrial currently offers at least 28 channels. Over 100 channels are available on cable and over 200 on satellite.
  
• Digital terrestrial offers interactive services, but these are more limited than those available on cable and satellite.
  
• Satellite, digital terrestrial and cable television all offer subscription-based services. However, BBC channels can be watched subscription-free on digital terrestrial and satellite.
  

Source: National Audit Office

Digital terrestrial television in the UK is licensed under the 1996 Broadcasting Act. This Act defined six digital 'multiplexes', each one consisting of a frequency band in the radio spectrum which can be used to transmit several digital terrestrial television channels as well as radio and data services such as Teletext. Under the 1996 Act, the BBC was given one digital multiplex (Multiplex 1).

1.4

The BBC's investment in Freeview

12

1.5 In 2002, ITV Digital, which owned three multiplex licences, went into administration and returned its multiplex licences to the Independent Television Commission (now replaced by Ofcom). The Independent Television Commission invited interested parties to bid for the licences. The BBC decided to make a linked bid with Crown Castle (a digital terrestrial television transmission provider). The BBC was awarded Multiplex B and Crown Castle was awarded Multiplexes C and D (Figure 6). Together with BSkyB, the BBC and Crown Castle also developed a proposal to establish a joint venture company to market subscription-free digital terrestrial television, which subsequently became known as 'Freeview'.

Investing in Freeview fitted well with the BBC's digital objectives and its commitment to the digital terrestrial platform

1.6 'Strengthening the BBC's digital services with the aim of providing something of value for all digital audiences' is one of the BBC's key objectives.

By 2002-03 the BBC was spending £350 million2 of its licence fee revenue on digital services (Figure 7).

2

Excludes some digital-related spend such as on newsgathering for digital channels and marketing digital services.

6 Changes in the ownership of multiplex licences since 1998

Source: National Audit Office

The BBC's plans for Freeview supported its aims to offer BBC digital television subscription-free

1.7 The BBC's digital television channels were approved by the Secretary of State for Culture, Media and Sport on the basis that they would be made available throughout the UK to licence fee payers with appropriate receivers and would be 'free at the point of use'. Prior to the launch of Freeview, digital television in the UK was largely synonymous with subscription services. At the end of 2001, the BBC estimated that only around 300,000 households were receiving its digital channels on a subscription-free basis.3

The BBC's investment in Freeview

13

3 Subscription-free services were (and still are) available on satellite.

1

1.8 The BBC wanted its digital services to be available to licence fee payers who did not want to pay monthly subscriptions but were willing to make a one-off payment for a digital receiver. The BBC considered that digital terrestrial television could be used to provide the BBC's digital services at relatively low cost to licence fee payers who did not want to subscribe to pay-TV services and that without this option, funding digital channels from the licence fee would be difficult to justify.

1.9 The BBC commissioned research into the market potential for a non-subscription digital set-top box and this indicated potential consumer interest in a set-top box priced at around £99.4 This research showed that digital terrestrial had the potential to attract licence fee payers who would not consider getting satellite or cable.

1.10 The BBC subsequently developed a proposal in November 2001 to create an alliance with other broadcasters willing to provide channels on a subscription-free basis to market digital terrestrial television and work with manufacturers and retailers to encourage them to sell set-top boxes for under £100. Under this proposal, the BBC envisaged that ITV would provide a pay upgrade option which would allow viewers to subscribe to additional channels.

1.11 The BBC recognises that investing in digital terrestrial television cannot by itself provide all licence fee payers with access to the BBC's digital services, and that its aim to provide universal access depends partly on the actions of Government and others in the industry (Figure 23 on page 33).

The investment fitted with the BBC's existing plans to increase its digital terrestrial capacity

1.12 The BBC could not put all of its television, radio and interactive services on its existing multiplex (Multiplex 1) as it did not have sufficient capacity. So prior to developing the Freeview proposal, the BBC had already considered acquiring additional capacity. However, a successful bid for a multiplex licence would also offer the extra capacity the BBC sought.

If digital terrestrial television services stopped operating, this would have been damaging to the BBC given the investment it had made

1.13 The BBC made a significant strategic and financial commitment to digital terrestrial television. Between 1998, when digital television was launched in the UK, and the end of March 2002, when ITV Digital went into administration, the BBC had spent nearly £50 million on transmitting television services on digital terrestrial (Figure 8).

The BBC's investment in Freeview

14

4 Set-top boxes are now available for around £50.

8

1.14 When ITV Digital went into administration, there was widespread uncertainty about the future of digital terrestrial television and the potentially negative effect on digital switchover (Figure 9). If digital terrestrial television was no longer available, the BBC would not have been able to build upon the investment it had already made in establishing its services on digital terrestrial television. A successful bid for a multiplex licence and actively promoting Freeview would provide the BBC with greater certainty that digital terrestrial television would continue in the UK.

9 The Government's plans for digital switchover

In September 1999 the Government announced its intentions to switch off analogue terrestrial television signals, subject to the following criteria being met:

• everyone who can currently get the main public service broadcasting channels in analogue form (BBC 1, BBC 2, ITV, Channel 4/S4C and Five) can receive them on digital systems; and
  
• switching to digital is an affordable option for the vast majority of people. As a target indicator of affordability, 95 per cent of consumers have access to digital equipment.
  

The Government currently envisages that switchover could start in early 2006 and be completed by 2010.

The BBC's investment in Freeview

15

1

Faced with significant time constraints, the BBC acted pragmatically in putting together its investment plans

The BBC acted swiftly in developing a proposal to bid for one of ITV Digital's multiplexes

1.15 At the beginning of May 2002 the Independent Television Commission invited expressions of interest in acquiring the three multiplex licences surrendered by ITV Digital (Figure 10). Prospective bidders had only six weeks to submit bids for one or more of the licences. The timetable was accelerated so that a full digital terrestrial television service could be re-launched as soon as possible while a skeleton service continued to operate on air.

1.16 The BBC consulted with a range of third parties about the potential for a joint bid. Some of the third parties proposed a partly or wholly subscription-based package, but the BBC was concerned that subscription services would lead to consumer confusion. Following these consultations, the BBC opted to bid for one of the licences.

The BBC adopted an accelerated approvals process for Freeview to ensure its bid for an additional multiplex licence was submitted on time

1.17 The BBC's internal guidelines require the preparation of an investment case for all investments over £500,000. Investment cases are needed to support investment decisions and provide a framework for planning and managing project delivery by:

• demonstrating the strategic fit with organisational objectives and priorities;
  
• showing the options available;
  
• assessing the commercial aspects of projects where external procurement is required;
  
• demonstrating the costs and benefits of the investment and the availability of funding; and
  
• setting out clear objectives, outcomes, outputs and targets and how they will be achieved.
  

The BBC's investment in Freeview

16

10

Key milestones in the BBC's investment planning

19th

BBC sends letter to Department for Culture, Media and Sport seeking formal permission to establish BBC Free to View Ltd to hold the multiplex licence and outlining financial and other exposures

Department for Culture, Media and Sport sends letter granting approval to BBC involvement in Freeview and establishment of BBC Free to View Ltd

August

1st

The BBC's investment in Freeview

17

1

1.18 Under the BBC's internal guidelines, the Freeview proposal required approval from the Executive Committee and Board of Governors because it was a large (greater than £10 million) and strategic investment. To ensure that the bid for an additional multiplex licence was submitted to the Independent Television Commission by the required date, the BBC's Executive Committee did not request a single detailed written investment document for Freeview, as it would normally have done, but, based on various written submissions, it did focus on quickly identifying the main costs and benefits of Freeview, the key risks and how they could be managed. (Figure 2 on page 9 provides an analysis of the ongoing risks to the BBC's investment in Freeview).

1.19 The BBC estimated that Freeview would cost between £10.7 million and £11.5 million5 a year over the 12 year term of the multiplex licence (Figure 11), giving a total cost of between £128.4 million and £138 million. This was additional to the cost of operating Multiplex 1, which it was awarded under the 1996 Broadcasting Act. The total cost to the BBC of making its digital channels available on digital terrestrial in 2003/04 is shown in Figure 12.

11

Most of the estimated cost to the BBC of investing in Freeview was for transmission

NOTE

• The BBC agreed to pay Crown Castle up to £800,000 a year for unfilled capacity on one of the multiplexes operated by Crown Castle. The BBC has paid Crown Castle nearly £300,000 to date and all the capacity is now taken.
  

Source: BBC

The BBC's investment in Freeview

18

5

This includes £7.2 - £8.0 million of transmission costs which the BBC might have incurred independently of the Freeview project, as part of efforts to obtain more capacity.

12 Total BBC expenditure on digital terrestrial in 2003/04

1.20 The BBC estimated that the impact of investing in Freeview would be a steady growth in the number of households with digital terrestrial, reaching 9.4 million households at the end of the 12 year term of the multiplex licence (Figure 13). These projections did not show what effect changes in government switchover plans would have or how marketing spend may have to be increased in future years to achieve the projected levels of take-up. The BBC did, however, recognise that the budget allocated to marketing may need to be increased in the future. The BBC considered that the projections were achievable and included them in the bid submitted to the Independent Television Commission for Multiplex B.

The BBC's investment in Freeview

19

1

13

The BBC forecast that investing in Freeview would contribute to a steady increase in the number of households with digital terrestrial television

Year

Source: BBC

1.21 The BBC's Board of Governors considered the estimates of costs and take-up and approved the investment in Freeview on 12 June 2002 on the basis that it was "content to spend approximately 1.5 per cent of the BBC's annual income on distributing BBC channels to a proportion of the population".6

1.22 The BBC's bid for Multiplex B was submitted on 13 June 2002 to the Independent Television Commission, which received five other applications.

The BBC identified specific value for money criteria for its investment in Freeview

1.23 The BBC told us that the primary objective for Freeview was to launch the service to ensure that as many licence fee payers as possible could receive the BBC's digital services on a subscription-free basis. The associated value for money criteria which the BBC set were:

• take-up (the percentage of households with digital terrestrial television); and
  
• the cost per digital terrestrial household (the cost to the BBC using households as the unit cost).
  

The BBC's investment in Freeview

20

6

The cost as a percentage of income consisted of the costs associated with Multiplex 1, Multiplex B and overheads (including marketing).

1.24 Although the BBC identified take-up and the cost per household as important value for money criteria, they were not the BBC's main objectives for investing in Freeview.

1.25 Targets and projections help to provide transparency and accountability by demonstrating the outcomes expected from investments. The BBC decided not to publish the take-up projections it submitted to the Independent Television Commission on the basis that it was uncertain about how Freeview would develop. The sale of set-top boxes and integrated digital television sets depended primarily on the response of retailers and manufacturers and not just the actions of the BBC or the Freeview company.

1.26 At the time when the BBC bid for an additional multiplex, the BBC estimated that the cost of transmitting its channels on digital terrestrial television was around £12 a year for each household that had digital terrestrial. Although the BBC considered that this did not offer value for money for licence fee payers, it did not specify the cost per household that would represent value for money. The BBC would not have been able to significantly reduce its expenditure on digital terrestrial services if take-up had been poor following the launch of Freeview.

The BBC's investment in Freeview

21

• THE CREATION OF THE JOINT VENTURE AND THE LAUNCH OF FREEVIEW
  

2.1 This part of the review examines the launch of Freeview and the performance of the joint venture marketing company established between the BBC, BSkyB and Crown Castle. It covers:

• the setting up of the joint venture company;
  
• changes made to improve signal reception prior to the launch of Freeview; and
  
• the performance of the joint venture company.
  

The BBC had good reasons for forming a joint venture to market Freeview

2.2

Although the BBC did not prepare a detailed analysis of the criteria for the selection of partners or shareholders based on required competencies, resources and assets, the BBC saw the following advantages to creating a joint venture to manage a call centre and website and relations with retailers and manufacturers:

• bring together the members of the Freeview consortium in a legal entity, protected by limited liability, which could market Freeview;
  
• allow the BBC to share the costs of marketing Freeview;
  
• utilise BSkyB's experience of call centre management and marketing digital television;
  
• incorporate Crown Castle's experience of digital terrestrial television; and
  
• provide a forum within which the three shareholders could meet and discuss the progress of Freeview.
  

2.3 The BBC could have adopted a different approach, such as using outsourced contracts, but it would not have been able to share the cost of running services such as the call centre with other shareholders. Alternatively, the BBC could have relied on an informal partnership arrangement to run the joint venture but this would not have ensured contractual protection if things went wrong.

The creation of a joint venture company (Digital Television Services Ltd) formalised the relationship between the BBC and the other parties in the Freeview consortium

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2.4

The setting up of the joint venture company was supported by a Shareholders Agreement which ensured that there was a binding commitment between the BBC, Crown Castle and BSkyB to provide marketing support for Freeview. This Agreement was developed with input from all three prospective shareholders and set out the constitution of the company, the names of the executive officers, protocols for board meetings, voting issues, entry conditions and exit provisions.

2.5 BSkyB's involvement in Freeview allowed them the opportunity to increase awareness of the Sky brand in a wider range of households, and to increase viewing and advertising revenue from its subscription-free channels. However, some of the third parties we consulted questioned whether the objectives of the BBC and BSkyB could be fully aligned since Freeview could potentially compete with satellite for digital customers. The shareholders managed this risk through the Shareholders Agreement which prevents the BBC or any of the other shareholders from being forced to accept changes to specific aspects of the joint venture, such as the nature and scope of its activities, if there is not unanimous agreement among all shareholders.

2.6 The joint venture company was named Digital Television Services Limited.

A target annual budget of £3.75 million was set by the company's board, and it was envisaged that the BBC would contribute £1.25 million a year.

2.7 The main objective of Digital Television Services Ltd is to promote the Freeview brand within its budget. The Company has no direct control over the manufacture or sale of set-top boxes or integrated digital televisions, except through licensing the Freeview brand, and has no sales targets.

The BBC made improvements to the reliability of reception on its multiplexes

2.8 When it was launched in 1998 the reception of digital terrestrial television was affected by the use of low transmitter powers and the way the signals were sent.

This resulted in some viewers experiencing intermittent break up of the vision and sound due to interference from electrical appliances. To try and overcome these problems as far as possible, the transmitted powers of the Freeview multiplexes were increased at a significant number of transmitters and changes were made to the characteristics of the digital signals. Although the changes to the signals reduced the capacity of each of the Freeview multiplexes, the BBC had enough capacity available to broadcast all of its digital television and radio services as well as interactive content on digital terrestrial.

2.9 Further improvements could be obtained by increasing the power of digital signals but this would have a detrimental affect on existing analogue services both inside and outside the UK, and might therefore not be compatible with international commitments. However, if analogue signals are switched off, the BBC will be able to increase the power of its digital signal.

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2

Freeview was launched in quick time

2.10 Freeview was launched in October 2002 and Digital Television Services Ltd ensured that the most important services were in place in time for the launch (Figure 14). Figure 15 shows the number of phone enquiries, website hits and text messages that Digital Television Services Ltd receives per month.

The company also liaises with manufacturers and retailers, in particular to monitor how retailers are merchandising Freeview.

The postcode check facility could provide more detailed information on coverage

2.11 The Freeview website provides information about the services available on Freeview, how to get it and a facility to check whether Freeview can be received at a given postcode. Entering a postcode onto the website generates a response of:

'Yes' - if the recipient is able to receive all the Freeview channels, 'No' - if the recipient can receive none or only some of the channels, or 'Yes, but' - if the recipient would need an aerial upgrade to receive the channels.

2.12 Although the coverage of different multiplexes varies so that some but not all channels might be available at a given postcode, the Freeview website does not give details of the individual channels that can be received. As well as investing in the postcode check facilities provided by Digital Television Services Ltd, the BBC also operates its own postcode check service which advises licence fee payers if they can receive Freeview. The BBC's postcode check includes information about whether BBC channels can be received through Freeview at a given postcode. A more detailed alternative to these is the Digital Television Group's website, which lists the individual channels on digital terrestrial that

14 Marketing support services available when Freeview was launched

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• This specification did not require licencees to include audio description capabilities (the BBC has broadcast audio description services on digital terrestrial television since May 2000, as required under the 1996 Broadcasting Act, but until a set-top box with audio description capability was launched in January 2004, the equipment needed to receive these services was not generally available).
  

Source: BBC

15

Enquiries received by Digital Television Services Ltd between September 2003 and February 2004

Call volumes Text messaging

Website visits

Source: Digital Television Services Limited

can potentially be received at a given postcode.7 Its website is designed for the digital industry rather than licence fee payers, but is a good example of the information that could be provided.

2.13 Residents of the Isle of Man, Jersey and Guernsey, who have to pay the television licence fee, are not able to check the availability of Freeview using the Freeview postcode check facility as it does not recognise postcodes in the Isle of Man or Channel Isles.

The BBC needs to be clear about the costs it incurs in providing services to the Freeview company

2.14 In the early operational weeks of the joint venture, the shareholders responded quickly to problems by contributing specialist expertise at no extra cost to Digital Television Services Ltd. The shareholders still make some uncharged contributions for specialist help which they provide.

2.15 In the BBC's digital campaigns, the BBC draws attention to the way in which its digital services can be received. The BBC currently gives emphasis to Freeview alongside references to satellite and cable. The BBC considers this to be part of a legitimate effort to raise awareness about a 'new, subscription-free way' to receive the BBC's digital channels. It sees this as entirely driven by the BBC's corporate objective to promote its digital services and does not make a recharge to the Freeview company (or to satellite and cable companies).

It is important that the BBC ensures that all platforms are treated in a neutral way. The BBC says that this will be achieved because the emphasis on Freeview is a short term measure to draw attention to a 'new service' and that other new subscription-free services would be treated in a similar way.

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7

The Digital Television Group is an industry association for digital television in the UK. Its postcode checker uses the same database as the Freeview postcode checker.

THE IMPACT OF FREEVIEW

3.1 This part of the review examines the impact that the BBC's investment in Freeview has made so far. It covers:

• the take-up of digital terrestrial since the launch of Freeview;
  
• consumer awareness of Freeview; and
  
• digital terrestrial coverage.
  

In terms of take-up, Freeview has been a success

3.2 The BBC's investment in Freeview has contributed to an increase in the number of households with access to its digital services:

16

By March 2004, the number of households with digital terrestrial television had significantly exceeded the BBC's initial projections

• The projections included in the BBC's bid for Multiplex B submitted to the Independent Television Commission in June 2002. The BBC identified the percentage of households with digital terrestrial television and the cost per household as the key value f