Planning and Licensing

CHAPTER FIVE

Planning and licensing procedures have been the primary determinant of the number of services allowed to operate in the different geographical markets, of the types of new services that can be introduced and of the timing of their introduction.  These controls can serve a useful purpose in the efficient management of a scarce resource, such as the broadcasting spectrum, and to enable orderly operation of broadcasting (e.g. by avoiding interference between stations).  Although usually they are not controversial, there is a danger that they could be used as de facto economic controls of the nature and rate of development of broadcasting services.  For example, establishing unnecessarily high technical standards and using them as the basis for planning can have a substantial impact on the number of services that can be licensed in any one area or overall.  Similarly, licensing may be used for orderly allocation of available frequencies in response to market demand for services or for inappropriately restricting entry and competition.

This chapter considers the role and functions of planning and licensing and their impact on media structure and competition.

FREQUENCY PLANNING

Frequency planning is necessitated by spectrum scarcity and the need to avoid interference between broadcast services.  The use of the radio frequency spectrum is governed by international conventions that designate specific bands for different purposes and by domestic policies on the number and type of services that are made available.  Australia follows the international conventions on spectrum use and has set aside the following bands for broadcasting purposes:

• AM radio transmitters are allocated a 9 kHz channel in the 526.5 kHz to 1606.5 kHz portion of the Medium Frequency (MF) band;
• FM radio transmitters are allocated 200 kHz channels in the 87.5 MHz to 108 MHz portion of the Very High Frequency (VHF) band;
• Television uses both VHF and Ultra High Frequency (UHF) channels.  VHF television transmitters are allocated 7 MHz channels in the 45-52 and 56-70 MHz (Band I) and 174-222 MHz (Band III) portions of the VHF band.  UHF channels are also allocated 7 MHz each and are located in the 520-820 MHz (Bands IV and V) portion of the UHF band.  Because of previous allocation policies a small number of long-established television services occupy channels in the VHF band now reserved for FM radio.  Those stations are to be relocated to the UHF band either at the request of the operator or if the frequency is needed to accommodate FM radio services.

To avoid interference between services in different areas, the maximum number of channels available for use in a particular area is markedly less than the total number of channels in the bands.  The number of channels available in any one area is determined by policy considerations on the distribution of services and by the technical criteria and methods adopted to avoid interference between services.

Broadcasting services using the same channel must be transmitted from sufficiently separated locations to avoid interfering with each other (co-channel interference).  Without separation of the signals, it would not be possible for consumers to receive a wanted signal without interference from unwanted signals broadcast on the same frequency.  Generally, the distance between stations using the same channel is determined by the power of the transmitter, the radiated pattern of the signal, the locations and heights of the transmitting antennas and the topography between the antennas.  All these factors may be adjusted to maximise intensity of re-use of the same channels at different locations.  Closer separation may also be achieved technically by offsetting the operating frequencies of stations away from the standard channel frequency and thus provide greater capacity for receivers to distinguish between the signals.  The more often (or intensively) a channel is used in different areas, the greater the likelihood of interference.  Typically, two television stations using the same channel are separated by a distance of about 600 kilometres.

Similarly, receivers are unable to distinguish between signals on adjacent channels with substantially similar coverage (adjacent channel interference).  For this reason, wide coverage VHF FM radio and television channels in the same area have at least one clear (unused) channel between them and wide coverage UHF television stations at least two. ⁽³⁾  Offsetting of frequencies can facilitate signal separation.  Also, adjacent channel interference may be reduced by limiting the practice of co-siting transmitting antennas.

In general, frequency allotment and planning can be seen as a partitioning problem.  For each service area, the planner seeks to choose frequency channel allotments for both transmitters and translators to accommodate as many services within that service area as possible, transmitter siting, and the signal's operating power and radiation pattern, having regard to the frequencies needed to support services in other areas.

The existing distribution of services largely pre-dates the ABA's responsibilities in this area (gained in 1992) and reflects past policies, priorities and practices.  Currently, as part of its planning functions, the ABA is responsible for determining the number and disposition of channels in Australia taking account of differences in the level of demand in different areas.  The BSA replaced earlier planning guidelines with a new approach whose focus is the development of an integrated national plan taking account of the criteria set out in the Act, namely:

1. Demographics;
2. Social and economic characteristics within the relevant licence area, neighbouring areas and Australia generally;
3. The number of existing services and the demand for new services;
4. Developments in technology;
5. Technical restraints relating to service delivery or reception;
6. Demand for radio frequency spectrum for non-broadcast uses;
7. Such other matters as the ABA considers relevant.

The BSA envisaged implementation of the ABA's spectrum planning function as a three-stage process.  The first stage required the ABA to set priorities between different areas of Australia for the preparation of licence area plans.  For this part of the process, the ABA divided the country into planning zones (22 for television and 23 for radio) and assigned each to one of five groups with different levels of priority for the preparation of licensing plans.  Allocation of the zones to the different priority groups was determined on the basis of the variety of services already available in a zone.  The fewer the services available in a zone, the higher was the priority assigned to it.

The second stage involved preparation of a national frequency allotment plan following wide public consultation by the ABA.  The allotment plan determines the distribution of broadcasting spectrum throughout the country based on the number of channels reserved for the provision of broadcasting services in each of the planning zones.  In preparing the frequency allotment plan the ABA assumed, as a matter of policy, that there would be no change to previous plans for six wide-coverage television channels throughout Australia, including regional and remote areas, and that there would be very limited scope for introducing additional AM radio services without re-planning of the AM band.  For VHF FM radio, the ABA adopted the following targets for the distribution of services:

• 16 wide area coverage channels in mainland State capital cities;
• 12 wide coverage channels in "main cities" such as Canberra, Hobart, Darwin, Gold Coast, Newcastle and Wollongong;  and
• 8 wide coverage channels in regional and remote areas.

The third step of the planning process involved the sequential preparation of licence area plans based on the frequency allotment plan.  A licence area plan details the number of broadcasting services, including national, commercial and community services, that can be made available within a specified area.  It also details the characteristics of each service, including licence area coverage, channel frequency, transmitter site and technical specifications such as effective radiated power and radiation pattern.  For each licence area, operators of transmitters are required to provide an "adequate" minimum signal strength in communities of 1,000 or more people.  As a matter of policy, however, the technical planning characteristics assume that communities with a population of 200 or more people are entitled to expect a service from licensed broadcasters.

LICENSING

Frequency allotment plans determine the number and type of broadcasting services to be made available in a particular area.  The formal process for the assignment of rights to operate those services is known as licensing.  Until 1977 the power to issue broadcasting licences was exercised by the responsible Minister who could act independently of advice from regulatory authorities.  Although concerns that the licensing process was open to political interference or patronage had been one of the reasons for the establishment of the Australian Broadcasting Control Board in 1948, the Board was given only the power to make recommendations which the Minister was not bound to follow.  The transfer of the licensing power to the Australian Broadcasting Tribunal was intended to make the licensing process publicly accountable and to remove the potential for political interference.  But even then, the government retained the power to determine the number of services that could be made available, with the Tribunal having the power only to determine who would be allocated the licence through a public inquiry process designed to identify the most suitable from among the applicants (commonly dubbed "the beauty contest").

In 1992, the public inquiry process was abandoned in favour of a price-based system as the primary mechanism for the allocation of new commercial broadcasting licences.  Section 36(1) of the BSA required the ABA to determine in writing a price-based system for allocating commercial broadcasting services.  Current arrangements are detailed in the ABA's Commercial Broadcasting Licence Allocation Determination No. 1 of 1998.  Applications must be accompanied by the required application fee and can be made only by Australian companies.  If more than one application for a licence is received, the ABA is required to hold an auction-style sale and allocate the licence to the highest bidder.  The successful bidder is required to make a deposit of 10 per cent of the bid immediately following the auction and to pay the balance between 45 and 47 days after the auction.  Issue of the licence follows provided the applicant meets the requirements of the Act.  If there is only one applicant for the licence, the ABA is required to issue the licence to that applicant at the pre-determined reserve price.  Unless otherwise permitted by the ABA, successful applicants must begin a service within one year of being allocated a licence.

To comply with the requirements of the Act, a licence holder must be a company formed in Australia and the ABA must be satisfied that the issue of the licence to the successful applicants would not "lead to a significant risk of" an offence against the Act and related regulations and licence conditions.  In deciding the likelihood of such a risk, the ABA is required to consider (s 41(3)):

the business record of the company, and of each person who would be in a position to control it;

the record of the company, and that of each person who would be in a position to control it, in situations requiring trust and candour;

whether the company, or one of its potential controllers, has been convicted of an offence against the Broadcasting Services Act or the regulations made under it.

Restrictive Licensing Practices

The power to grant rights for the operation of broadcasting services has always been exercised with considerable restraint.  Initially, some restraint was justified by spectrum scarcity and the need to avoid interference between stations.  However, expansion of new services continued to be unnecessarily constrained long after more intensive use of the spectrum and new types of services had been made possible by technological advances.  As pointed out by Cole (1966), expansion of broadcasting services in Australia was prevented by highly restrictive policies designed to protect incumbents from competition rather than by technological constraints or insufficient demand for additional services.

The protection of incumbent broadcasters was thought to be justified by their role as "public trustees" of the airwaves.  The regulatory authorities were concerned that expansion of services could threaten the viability of incumbents and run the risk that programme quality would decline.  Although the policy of protecting the commercial viability of incumbents was not formalised in legislation until 1977, its active application was acknowledged by regulatory authorities as early as the 1950s (ABCB, 1952) and is reputed to be the primary reason for virtually no growth in the number of radio services between the 1940s and 1970s.

Concern with the commercial viability of incumbents has been, and continues to be, a major reason for extensive delays in the introduction of new services.  Although currently considerations of commercial viability are mandated formally only in the context of introducing digital television services in regional areas, their application in other areas does not appear to have abated.  For example, the ban on the use of the currently unallocated sixth television channel for new commercial services as well as the ban on new commercial television services using digital technology until 2006 are specifically intended to shelter incumbents from competition (Alston, 1998).  The much delayed introduction of pay television was also primarily the result of the application of the same policy.

Economic Features of Broadcast Licensing Systems

The administrative system of spectrum planning and frequency allotment outlined above necessarily involves the use of arbitrary criteria and standards for the allocation of channels to particular areas.  For example, the targets for the allocation of FM channels in mainland State capital cities seem to assume the same eventual demand in each of the cities.  While this allows the development of a symmetric allocation pattern, it takes little account of the highly different demand patterns likely to be generated by substantially different cities such as Adelaide and Sydney.

Spectrum allocation plans have the inherent problem that, once a channel allocation pattern has been set and services begin to be deployed on the basis of that pattern, reallocation of channels to accommodate changes because of increased demand or other reasons are difficult and expensive to implement.  A good example of the difficulties and costs involved is provided by the delayed introduction of many FM-radio services because of the need to relocate television stations that had been previously allocated spectrum in the FM band.  Similar problems may arise from other technical criteria used to develop plans, including criteria for such things as radiation power and pattern and separation of stations on the same frequency.  For example, the technical criteria chosen in earlier years for the distribution of radio services are the primary reason for the inability of the Australian AM band to accommodate a much larger number of stations as has been achieved elsewhere.

The arbitrary requirement for the provision of an adequate broadcast signal throughout a licence area, although equitable in terms of providing the same service to all the residents of the licence area, is unlikely to promote efficient use of resources.  Historically, to ensure over-the-air distribution of an adequate signal throughout the licence area planners have relied on the use of high-power transmitters or of supplementary transmitters and translators, each using a separate frequency channel, with little concern for the associated opportunity costs.  Using high-power transmitters and supplementary transmitters or translators reduces the number of services that can be accommodated in the same licence area or elsewhere because of potential interference between services using the same or adjacent channels.  In other words, there is a trade-off between the provision of an adequate signal throughout a licence area and the number of services that can be provided.  The apparent focus of planners on a broadcast signal of minimum strength throughout a licence area, without consideration of other possible alternatives for satisfactory reception, may be costly to society.  For example, the installation of high-gain antennas by relatively few residents in weak signal areas would release channels, otherwise needed to operate translators, for the provision of additional services in the same area or elsewhere.  The benefits to society from additional services available to many people are likely to be much greater than the costs that would be incurred by a few for the installation of high-gain antennas to improve their reception.

Determinants of Licence Values

Usually the value of any asset is determined by the price at which its ownership changes hands in the marketplace.  For broadcasting, the value of a new commercial licence can be determined from prices paid at auctions.  Prior to the introduction of the BSA in 1992 virtually all the commercial licences were issued free of charge to applicants following a public inquiry by the regulator. ⁽⁴⁾  Subsequent owners have paid large sums to acquire the licences from the original owners.  Both the money paid to acquire licences from previous owners and the preparedness of aspirant licensees to pay substantial sums for the right to be allocated a new licence indicate that significant value is attached to a broadcasting licence.

THE VALUE OF CHANNEL 9 STATIONS IN THE LATE 1980S Paul Barry's (1993) account of the sale of Channel 9 television stations between Alan Bond and Kerry Packer throws some light on the value of capital city licences.  At their meeting in early 1987, the sale price of Packer's Sydney and Melbourne Channel 9 television stations to Bond was determined in this way:  Bond had claimed his Brisbane and Perth stations were worth $400 million.  "Packer's response had been to tell the eager entrepreneur that at those prices his own big-city stations .... must be worth at least a billion dollars. ... Bond, amazingly, had taken the figure seriously, topping the asking price with an extra $55 million.  "You only get one Alan Bond in your lifetime", Packer said later" (p. 389).  In 1990 Packer bought all four stations from Bond for about $200 million (p. 488).

The value of existing licences cannot be determined readily from market prices because licences are not usually sold separately from the other assets of broadcasting stations.  It may be possible, however, to use market prices of stations to determine licence values indirectly.  Theoretically, the value of a broadcast station, including its licence, may be estimated as the discounted present value of the future stream of advertising revenue, less the operating costs of the station during the period of currency of the licence.  The value of the licence may then be calculated by subtracting the value of the tangible assets (studio, transmitter, etc.) and of intangible assets (exclusive of the broadcasting licence) owned by the station from the estimated value of the station.  In practice, such estimates require details of the sale price of a substantial number of stations, as well as details of operating costs and values of the station's tangible and intangible assets.  However, because stations do not change hands frequently and because most of them are privately-held companies from which accounting details are difficult to get, valuation exercises of this kind are likely to be difficult to perform. ⁽⁵⁾

In broad terms, all factors that impinge on the revenue and operational cost of a station would have an impact on the value of its licence.  The major factors likely to influence the value of a commercial broadcasting licence include:

• Expected growth of total market advertising revenue.  Changes in attractiveness of competing media may influence total market advertising revenue.  For example, newspaper closures or amalgamations might increase the demand of television advertising.
• Expected increases in station share of total advertising will increase licence values, provided that the increased rating is not captured by higher management fees or payments to programme producers.  The allocation of additional licences or the introduction of non-broadcast competitive services is likely to reduce significantly an incumbent's licence value.
• Uncertainty surrounding future total industry or individual station revenue.  For example, certainty that licences will be renewed, that few new licences will be granted (and then only following consultation with existing licensees), and expectations that the government will be politically unwilling to introduce further competition increase licence values.
• Relaxation of local content requirements or other programme or advertising restrictions that increase costs and constrain operational behaviour will increase licence values.  Increased restrictions and other regulatory obligations of stations would have the opposite effect.
• Relaxation of ownership constraints likely to increase the set of potential future buyers would tend to increase licence values.

Broadcasting licences represent a large proportion of all commercial broadcasting assets.  The Nine Network, for example, recently revalued the licences for its Sydney, Melbourne, Brisbane and Darwin television stations from $554 million to $1.32 billion and the Ten Network revalued its stations (Sydney, Melbourne, Brisbane, Adelaide, Perth) from $326.4 million to $1.12 billion (Mathieson, 1998).  These revaluations pre-date the recent government decision on digital broadcasting giving existing television operators exclusive rights to the new technology and placing a moratorium on competition until December 2006, which is likely to have further increased the value of the incumbents' licences.  It is therefore important to understand the determinants of licence value in order to assess the impact of broadcasting licence regulations.

THE ALLOCATION OF THE THIRD COMMERCIAL TELEVISION LICENCE IN PERTH In the early 1980s Perth was about the same size as Brisbane and Adelaide, but had only two commercial television licences compared with their three.  The issue of a third licence arose and the Australian Broadcasting Tribunal was obliged to conduct a public inquiry to weigh up the public interest and the private interest of existing television and radio licensees, including protection of their commercial viability.  Parties giving evidence included the incumbent television and radio licensees and the two aspirants to hold the new licence.  Estimates of the value of the new licence ranged from $25 million to $45 million.  Both incumbents were prepared to pay $2.5 million a year each towards a new non-commercial public television station (like Britain's Channel 4) in order to prevent the new commercial licence being granted.  The new commercial licence was eventually granted, but the whole process took four years (1984-88) and vast resources were expended by all parties.  There were 117 sitting days (conducted on a quasi-legal basis) and the ABT produced a huge two-volume report.  The aspirants spent over $1 million each on their cases.  Incumbents probably spent even more.  After the "beauty contest" and the award of the prize, the lucky recipient sold the licence for an undisclosed sum.

Effects of Licensing Arrangements

The economic costs of the current licensing arrangements are difficult to measure.  Their measurement would require an assessment of the additional social welfare that would accrue from additional radio and television services.  Such an assessment could not be made without measures of the intensity, the level and the distribution of the demand for additional services and without estimates of the additional number of services possible under different licensing regimes.  The related benefits consist of substantial protection from entry competition (e.g. no new commercial television licences until 2006, to assist introduction of digital television) and accrue mainly to licensees as higher returns on investment and as windfall gains from increased licence values.  It should be noted, however, that other restrictions, such as those relating to programmes and licence fees, secure some of the benefits of restricted entry for the community at large.

An indication of the likely level of benefits accruing to incumbent broadcasters from licensing may be partially gauged from comparisons of the average revenue earned by capital city radio and television stations in 1996-97 (see Table 5.1).  The current arrangements for licensing commercial television stations provide for an equal distribution of stations in most centres, and eventually, Australia-wide.  While this has the appealing quality of being equitable in the sense that everyone in the country is provided with the same number of services, it is likely to be inefficient.  Residents of larger cities, in particular, are likely to be able to support more stations than currently provided and are consequently denied the benefits of additional services and additional programme diversity.  In addition, the current distribution of stations is likely to involve a substantial hidden cross-subsidy to maintain services in areas where this is unlikely to be justified by current levels of demand.  One of the effects of equal distribution of services in all areas is to confer considerable monopoly rents on incumbents in areas capable of supporting additional services.

Table 5.1:  Average Revenue of Capital City Broadcasters, 1996-97

	Television		Radio
	Number of Stations	Average revenue per station ($m)	Number of Stations	Average revenue per station ($m)
Sydney	3	238.5	9	16.2
Melbourne	3	202.4	9	11.1
Brisbane	3	101.6	6	8.6
Perth	3	55.4	5	6.6
Adelaide	3	49.0	5	6.7

Source:  ABA (1998a).

For television, capital city stations of the main networks absorb a disproportionate share of programming costs.  Currently, the average programming costs of capital city stations are equal to approximately 37 per cent of their average revenue.  For stations in non-capital city, multi-station areas the proportion of programming costs to revenue is 21 per cent (ABA, 1998a).  The capacity of capital city stations to continue to apply a disproportionate share of revenue to programmes, of course, would be diminished if additional stations were established in those cities.  The licensing of additional stations on the basis of the cities' capacities to support them would also mean that programming costs for the stations in other areas would increase by the extent of the current cross-subsidies.  Although the level of benefits accorded to television stations in the smaller capital cities cannot be assessed this way, the figures indicate that licensing controls confer substantial benefits to stations in the larger capital cities.  The figures also suggest that both Sydney and Melbourne, for example, generate enough broadcasting revenue to support additional television services at revenue levels comparable to those in other cities.

A similar situation exists in radio.  Although some stations in different areas have common ownership, cost-sharing arrangements, such as networking and programme syndication, are not widely used as stations tend to select much of their programming to suit the tastes of local audiences.  The relatively much higher average revenue earned by the Sydney and Melbourne stations is, therefore, a good indicator that those cities would be capable of supporting additional stations and that the existing stations in those cities are accorded a relatively high level of protection from competition (see Parish, 1968).

Another indicator of the high level of benefits accorded to radio and television stations by restricted entry of competition is the prices paid to secure new FM radio licences.  For example, in Sydney a total of $17.5 million was paid for the right to convert two existing AM stations to FM (Commonwealth of Australia Gazette, 1991).  Licences outside large metropolitan areas are also valuable assets and are eagerly sought.  A recent auction of seven commercial radio stations in regional Queensland raised $3.3 million.  The lowest successful bid of $325,000 was for a licence in Mackay and the highest of $600,000 for a licence in Bundaberg (ABA, 1998b).

CONCLUSION

Technical standards to avoid interference between channels and maintain desirable levels of signal quality involve a trade-off among several factors.  For example, a given licence area may be served by a single high-power transmitter or by several low-power transmitters each covering only a small portion of the licence area.  The trade-off here would be between the higher cost to broadcasters of installing and operating the several small power transmitters and increased channel capacity by more intense use of frequencies.  Similarly, there is a trade-off between the cost of reducing interference between transmitters on the same frequency by installing directional antennas and more intensive use of the same frequencies at different locations.

While natural monopoly and spectrum scarcity have undoubtedly played a part, restrictive licensing policies aimed at protecting the financial viability of incumbent broadcasters appear to have been the primary determinants of the high concentration of Australian broadcasting.  The excessive protection of incumbent broadcasters has constrained the choice of services to consumers and has delayed the introduction of services based on new technologies, with significant consequential loss of consumer benefits.  A more liberal, market-responsive approach would most certainly have led to an industry with a substantially different size, structure and performance.

An indication of the high level of protection that has been afforded to incumbent broadcasters is provided by the value of television and radio broadcasting licences in particular markets and by the prices that aspirant broadcasters are now prepared to pay to enter the industry.  These reflect the rents accruing to their holders and their presence is prima facie evidence of excessively restrictive entry to the industry.  While the auctioning of new broadcasting licences ensures that at least some of these rents will accrue to the public purse, restrictions such as the current ban on new commercial television will act only to increase the rents to incumbents at the expense of consumers who would be better served by a greater choice of services.

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ENDNOTES

3.  It should be noted that some consecutively numbered television channels, such as 9 and 10, are not on contiguous frequency bands.

4.  Some FM capital city stations allocated by auction in the late 1980s and early 1990s are the exception.

5.  For a more detailed discussion of licence values see BTCE (1991b).