Ofcom plans for the renewal of the national radio licences

This Ofcom consultation (39 pages, PDF) proposes aspects of a method to determine terms to be offered to Classic FM, talkSPORT and Absolute Radio for the renewal of their national radio licences. Responses by Friday 13 August 2010.

The financial terms include:

The consultation document gives an overview of the method that Ofcom intends to use in setting these parameters. The overall aim would be to recover the "combined value of the rights and obligations over the duration of the licence". In doing this, Ofcom would estimate the net present value (NPV) of the licence to an "efficient operator", adjusted by the initial costs that a new entrant might incur. Ofcom proposes a discount rate of 11.8 per cent, the WACC of a hypothetical new entrant, to calculate the NPV.

Ofcom proposes to do this calculation for the period starting in 2011 until the end of 2015. This is despite the fact that Ofcom proposes to renew the licences for seven years. There are provisions for early termination, including in relation to digital switchover: See The Digital Radio Action Plan (28 Pages, PDF).

In paragraph 3.74 Ofcom says “we believe that bidders would generally consider that 31 December 2015 would probably be the earliest possible date on which digital switchover could occur”.

If the licences were to last beyond December 2015, the same terms would apply until expiry.

Ofcom has not put forward any proposals on the relative weights for the PQR and the cash bid sum in the licence payments, although it states that stakeholders have expressed a preference in the past for a higher weight for the PQR.

Ofcom notes that there is an obligation on licence holders to simulcast on the national digital multiplex. In setting financial terms, Ofcom proposes to deduct from the value of analogue rights any deficits that licence holders might be expected to suffer from their digital service. It proposes not to take into account any surpluses from digital services.

For further information or advice please contact Shankar Rajagopalan.

Filed under Media, Ofcom.

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