14 October 04: Market Analysis advises ITV on hypothetical auctions for Channel 3 broadcasting licences
Channel 3 broadcasting licenses were originally awarded under a procedure laid down in the 1990 Broadcasting Act which specified that the licences be sold in a first-price, sealed-bid auction. Under the Communications Act 2003, in reviewing the financial terms for Channel 3 licences, Ofcom is required to determine the amount which would have been the cash bid of the licence holder in a competitive tender were the licences being granted afresh. In order to reflect the amounts that existing licence holders would be willing to bid for their licences, Ofcom proposed to use a discounted cash flow model to establish a "surplus value" for each licence, and to equate this value with the incumbent’s winning cash bid (Ofcom, 29 June 04, "Consultation on Review of Financial Terms for Channel 3 Licences"). Ofcom further proposed that, were the licences to be granted afresh, it would hold a combinatorial auction for up to 11 licences simultaneously. In Ofcom’s view this implied that the cash bid of the current licence holder would equal its own valuation for each licence less some measure of the market entry costs.
Market Analysis was retained by ITV plc to respond to Ofcom’s proposals on the likely outcomes of the hypothetical licence auctions. We argued that Ofcom’s analysis was flawed in that failed to provide a credible equilibrium analysis of the proposed combinatorial auction and as such significantly overestimated the likely value of the incumbent licence holder’s cash bid. Ofcom subsequently revised its proposals to take account of these criticisms (Ofcom, 13 October 04, "Methodology for reviews of financial terms for Channel 3, Channel 5 and Public Teletext licences").
Market Analysis’ report can be found on the Publications/Reports and Submissions section of the website. For more information see: www.ofcom.org.uk