Television andOfcom

David also worked with the UK government’s Office of Communications (Ofcom) on forecasts of net advertising revenue for the TV broadcasting net­work ITV These forecasts had significant policy consequences and are of interest in their own right.

Ofcom is the British government agency responsible for regulating the UK telecommunication and postal industries, including the licensing of UK TV broadcasting. In 2004, Ofcom needed to price the renewal of the advertising licence for ITV, the oldest and biggest commercial TV network in the UK. The licence fee had been specified to be calculated from forecasts of discounted net advertising revenue (NAR) over the subsequent decade.

Hendry (1992b) had developed a VEqCM for key variables in forecasting NAR—hours broadcast, audience reach, and the price of advertising time. David subsequently improved that VEqCM using PcGets. Ofcom then aug­mented that new VEqCM by forecasts from a macro-model for variables such as GDP, company profits, interest rates, and inflation.

In forecasting NAR, Ofcom initially preferred to forecast from that aug­mented VEqCM, rather than from the corresponding DVEqCM. Ofcom was concerned with how the differencing in the DVEqCM would eliminate long- run relationships from the VEqCM. However, representatives from the adver­tising industry described recent breaks in TV advertising that arose from innovations such as video recorders, Internet advertising, and alternative TV channels. Those breaks would be difficult to model with available data, yet they could cause systematic forecast failure by the VEqCM. David persuaded Ofcom that differencing the VEqCM would robustify their forecasts, remov­ing effects of those location shifts but retaining long-run information; see Section 4.3.

Ofcom published forecasts for NAR over 2004—2014 in Raven, Hoehn, Lancefield and Robinson (2004: Figure 6.5). Forecasts were calculated from three models: a “long-run trend” model, the VEqCM, and the corresponding DVEqCM. Those models’ forecasts were respectively increasing, relatively flat, and slightly declining over time. Robustification was consequential because of recent unmodelled shifts. Robustification by differencing the VEqCM removed location shifts in excluded variables such as the introduc­tion of personal video recorders, which had reduced TV advertising revenue.

These forecasts were key to setting policy: Ofcom set a lower licence fee because the DVEqCM forecasts showed NAR declining, rather than increas­ing. However, while the DVEqCM did perform the best of the three models ex post, even its forecasts proved too optimistic. Many of the variables included in the DVEqCM themselves experienced unanticipated location shifts during the forecast period. For instance, in the wake of the financial crisis, actual GDP and profits were much lower than forecast, poignantly illustrating that unanticipated location shifts can induce systematic forecast errors.

5.5