Examination of witnesses (Questions 1
- 19)
THURSDAY 18 NOVEMBER 1999
MR GAVYN
DAVIES and LORD
LIPSEY
Chairman
1. Mr Davies, Lord Lipsey, we welcome you to
this sitting of the Committee today, which is the opening of our
inquiry into your Report. We apologise for the slight delay in
inviting you in but we have just completed approval of a report
on another subject. You, Mr Davies, have very kindly distributed
to us a copy of your opening statement and therefore we do not
need to trouble you to read that out to us at length, on the other
hand, if you have any further brief opening remarks you would
like to make, we would be glad to hear them.
(Mr Davies) Chairman, thank you very much for giving
us this opportunity. I think I will just make three or four very
quick points which are spelt out in more detail in the evidence
we have submitted. The first is that in the context of the public
debate which has occurred since the Report was published and which
ended on 31st October, there has been a great mountain of evidence
submitted. Most of it, however, has reiterated evidence which
was made available to us when we were writing the Report. We have
not seen anything so far that has made us change our mind, and
consequently the Report and its conclusions still stand. On the
quantity of funding for the BBC, we essentially recommended that
the BBC should retain all of the proceeds of self-help, amounting
to £600 million extra by 2006. Much more than half of this
comes from efficiency savings which I know this Committee has
been looking into over the years. On top of that £600 million,
we recommended that another, approximately, £200 million
be found by new funding methods. The BBC had asked for about £700
million on top of the £600 million of self-help, so we in
effect recommended about a third of what the BBC had asked for
in terms of new funding. The BBC has submitted some detailed new
evidence in the last couple of months explaining what they would
spend the £700 million on and in fact that has been more
detailed than they submitted to the Panel. But I think I probably
can speak for most of the Panel in saying we still feel that the
quantum we have recommended makes sense, ie approximately £600
million to be found from self-help and about £200 million
to be found from new means. That then takes us on to the question
of what additional funding methodology is best. I think this is
where the Panel's Report has been most controversial. We recommended
what we thought was a relatively moderate digital licence supplement
to be phased out over time, so it would disappear completely before
the date of analogue switch-off, ensuring that nobody would ever
be forced to pay this digital licence fee supplement. The advantage
of this is fairness; those who benefit would pay for the digital
services of the BBC. The private sector in particular, in fact
I would say almost entirely the digital private sector, has suggested
that the digital licence fee would do a great deal of damage to
take-up. We do not agree. We do not agree with the evidence they
put to the committee at the time, we do not agree with the evidence
they have put since, and we think the impact on take-up will be
small. We also think that in order to get about half of the population
who are not interested in pay-TV to subscribe to digital services,
we will need to have free-to-air public service broadcasting content
provided by the BBC. If we do not have that content by the BBC,
we do not think that the take-up of digital will go much above
half of the population, and if that is the case analogue switch-off
will never happen. That cannot be good for the digital industry.
So we think they are being somewhat short-termist in their approach.
Two more points, briefly. We made a series of suggestions on accountability,
transparency, regulation and privatisation. These were very much
part of our package of recommendations because we wanted to change,
modernise and make more accountable the current BBC in exchange
for a moderate amount of additional public funding. We saw this
as a quid pro quo, we saw this as part of the same package.
We still think this, and we would be disappointed if we did not
see a large proportion of the recommendations we have made in
these areas being implemented because we think they have actually
found a great deal of consensus support throughout the broadcasting
industry during the public debate. On that, the National Audit
Office was an important part of our recommendations. We did feel
there was a role for the NAO in regulating and monitoring the
BBC in due course and we still feel that is the case, despite
the BBC opposition to that point of view. The final point is on
concessions. Since the Chancellor made his statement last week
on concessions for the over-75s a lot of people have said that
this conflicted with the Panel's Report. That is not actually
true. The Panel looked at broadcasting finance within the confines
of broadcasting and decided it would not be right to finance concessions
through a higher licence fee. That is not what the Chancellor
is doing, he is financing concessions through the public exchequer
and we specifically did not, and said we would not, take any view
on that subject.
2. Thank you very much, Mr Davies. Before I
call on my colleagues to question you could I just ask you for
a clarification, perhaps a comment, on something that you said
in your opening statement? In your Report, you list this BBC requirement
of £700 million. You now say since your Report has been published
they have clarified and filled in. Do you not think it a little
odd, we shall obviously have the opportunity of questioning the
BBC about this, taking into account that your Report could have
been, and could still be fundamental to the case that they were
advocating, that they did not provide you with full information
about this £700 million requirement?
(Mr Davies) The situation, Chairman, was the following:
they came to us quite early in our deliberations with a very detailed
but not fully specified series of programming objectives, which
added up to £700 million. They did specify in some detail
programming content which would have cost, I think, from memory
about £300 million, so they gave us full details of slightly
less than half of the bid. We asked them whether that could be
fleshed out further and essentially what they said was, I think
from memory, that it was unreasonable to expect full details of
programming content which may be several years into the future.
Remember, the £700 million does not apply until 2006. I must
admit I did see their point, it does make sense to leave some
margin for future contingencies. However, I have to say that when
the Panel came to make a recommendation about the total of additional
funding we did take into account that we did not know how the
BBC was intending to spend in detail any more than £300 million,
and I think that did probably did have some impact on our thinking.
I think some of this is reasonable, in the sense that the long
term is too far off to make detailed plans. Nevertheless, we would
have welcomed more detail on the specific items that they were
asking for.
3. I am certainly not pressing you, Mr Davies,
because it was not within your control. While, of course, no broadcasting
organisation can be expected to forecast years in advance what
it is expected to do, it is only four months since your Report
was published and yet in that period of four months, as you tell
us, the BBC has been able to provide substantial, additional information.
Would it not have made sense to provide that information to you
if they wanted to persuade you to recommend the increase of the
licence to the level that they wanted rather than one you recommended?
(Mr Davies) I think that, Chairman, is something that
the BBC should answer. We did ask them for more details. When
it came down to making our specific recommendations the thing
that we felt was important was that we had to know that for the
quantity of funding that we were recommending there were good
uses. We felt comfortable that at the quantity we were recommending,
the £200 million extra that I mentioned, the BBC had fully
specified uses which would justify that amount of additional spending.
We felt that we had done our due diligence, in the sense that
we had fulfilled the need to show that the money could be used
wisely and sensibly from the point of view of the public. The
other thing that we did recommend was that the Department of Culture
should further investigate the BBC's efficiency, the scope for
commercial revenue and other wider aspects of its funding before
making any further moves to implement our recommendations. I think
yesterday or the day before the Department announced they were
inviting a private consultancy firm to investigate these matters
with the BBC more thoroughly. I feel very happy that that is the
case because that was a recommendation that we made.
(Lord Lipsey) Could I add a sentence to what the chairman
said on this? Your point is a very fair one and indeed is reflected
in our Report. In Chapter 5, for example we say that one of the
reasons we did not feel able to recommend more is our difficulty
in seeing quite how the BBC establish priorities for the use of
the expenditure. If you gave them enough money they would have
dinosaurs popping out of the television set, walking across the
carpet and sitting on the children's knees. It would be absolutely
great but, of course, it would be extremely expensive. I do not
think their failure to prioritise really affected our Report all
that much. We said this was more an art than a science, we had
to look at the things they could do for the kind of money we thought
might be made available. Indeed we recommend in the end that they
get something like two thirds of the things they wanted to spend
money on but only at a cost of one third extra in the resources
they get from the licence payer. It is, as I said, an art rather
than a science. I do not think the BBC's weakness in prioritising
actually prejudiced the work of our Committee.
Chairman: Thank you. As Mr Davies pointed
out these are matters that we can, and perhaps will, raise with
the BBC.
Mr Fearn
4. Good morning. Your main conclusion is that
the BBC's public service should be funded by the licence fee rather
than advertising, sponsorship and subscription for the foreseeable
future. First of all, please, explain the foreseeable future?
Why does your Report include no detailed consideration of which
BBC services constitute the public service?
(Mr Davies) Mr Fearn, we were asked in our terms of
reference to assume that the licence fee should remain the key
and core part of BBC funding for the period up to the end of the
current Charter in 2006. We were also asked to take a more speculative
forward look at BBC funding in the future. We accepted the commission
from the Secretary of State on the basis that the licence fee
would remain as the core part of the BBC funding. Speaking for
myself I had no problem doing that, since I actually believed
the licence fee should remain the core part of BBC funding, and
I still believe that having spent the last twelve months thinking
further about this subject. I think that all of the other alternatives
for financing a broadcaster as comprehensive as the BBC are inferior
to the licence fee. I know that the licence fee has significant
drawbacks. I am sufficient of an economist to know it is a regressive
way of charging people for television services but I think it
has proven over many, many decades in the UK that it produces
an out-turn for the broadcasting system, the BBC plus the rest
of the private sector, which is in the national interest. I think
advertising, in particular, which is really the main alternative,
at least as technology now stands, would greatly damage both the
BBC's provision of public broadcasting and would also damage private
sector broadcasting as well. It would simply take money away from
the private sector broadcasters and give the BBC the incentive
to compete commercially for that money. We felt very much in line
with the Peacock Committee of the late 1980s that that was the
wrong way forward for the BBC. You asked how long may that last?
We in our Report said we think it will last for as long as this
current Charter. It may last longer, we do not know. Some of us
think it will but we were really only asked in specific terms
to look at the Charter period.
5. Thank you. You mention the Charter, of course
you suggest that as part of the Charter Review recent services
should be reviewed to decide whether they reach public service
criteria. Why should such a review not take place now immediately?
(Mr Davies) I think it is appropriate to look at the
BBC in a root and branch way when the Charter is renewed. After
all, the Charter has only recently been renewed and at that time
Parliament and the Government took the view that the BBC should
have a comprehensive role in UK broadcasting involving a large
number of services which did not exist ten to 15 years ago, and
that was reviewed when the Charter was renewed a few years back.
I personally think it is too early to have a root and branch reassessment
of that decision. I think we made that decision as a nation a
few years ago, three or four years ago, and we should give it
a chance to run through the Charter period. But one thing which
I do think is important, and is an important element in our review,
is that the services that the BBC has been allowed to launch in
the new Charter period should not be allowed on a once-and-for-all
basis. We should not take the view that the BBC only needs to
get permission once to launch a new service and then it should
retain that service forever. We felt that when the Charter is
renewed that is the appropriate time to look back at the services
which have been provided by the BBC and make sure they all have
a public service rationalisation in the way that they have actually
been provided to the viewer rather than in theory, which is how
the current system actually works, when the BBC applies for a
new service to the Secretary of State. We also suggested that
the whole process of application for new services by the BBC should
be profoundly changed with the Secretary of State publishing criteria
for new services, that the BBC's request should be published,
that there should be a debate, including we would hope input from
this Committee, before the Secretary of State makes a judgment.
So the transparency and accountability we were seeking to get
for the BBC was very much built into the whole question of new
services.
6. Finally, could I move on to television services?
You say they go nowhere near individual charging for television
services. Why will this not happen? Will it not be straight forward
after analogue switch-off?
(Mr Davies) Are we talking in terms of subscription
charges?
7. Yes.
(Mr Davies) We have clearly moved a long way in that
direction in the last 15 years. One of the ironies of the last
15 years is that the Peacock Committee suggested that the BBC
should become increasingly a subscription broadcaster and suggested
that the technology be put in place to achieve that, and they
thought that would happen quickly. They were wrong in the near-term
because the technical changes did not occur, so subscription was
not possible. As you correctly point out, for households with
digital technology and with satellite technology and cable technology
subscription charges for channels are becoming feasible on a much
wider basis. But we have to bear in mind, Mr Fearn, that it is
still true that 70 per cent of UK households do not have that
capability, they are still watching solely free-to-air terrestrial
television. So while we are moving in that direction and while
Peacock may one day be proven right, I think we are still technically
quite a long way from making that feasible.
Chairman
8. Just building upon the reply you have given
to Mr Fearn about the proportion of people who have or are likely
to have subscription to digital TV, the Secretary of State in
the debate in the House of Commons a couple of weeks ago gave
a figure—and I think it was 1,800,000—of people who
are subscribing to BSkyB or ONdigital, and no doubt that figure
has increased since then and it is likely, at whatever rate, to
go on increasing. But if we take that figure which the Secretary
of State gave of 1,800,000 who are gaining access not only to
BSkyB and ONdigital services but also to such BBC digital services
as there are, have you got any estimate of the number of people
who have decided to gain access to BBC digital services without
subscribing either to BSkyB or ONdigital?
(Mr Davies) I do not recall having any such estimates,
Chairman, but I would imagine that the number is not particularly
large. This is very much a guess but from what I know of the way
this market is developing, I do not think that a very large number
of households will solely be choosing to go digital to receive
the current BBC offering. I think that will continue to be the
case for some time, because I think the early adopters of digital
television may well be those most attracted by the Sky package,
the ONdigital package or the cable package. But the evidence that
I have seen on the longer-term suggests to me that the number
of people who will go digital simply to get the pay-TV elements
from Sky and others which are now available may be only about
half the population, because only about half the population may
ever be attracted to the mix of sports, movies, re-runs and children's
cartoon channels which is currently the main part of the pay-TV
package. So whereas I think the early adopters of digital may
well be overwhelmingly going for pay-TV as their main objective,
if we are going to get the other half of the population to go
digital I think we need to provide them with enhanced free-to-air
public service channels. ITV can obviously do some of that but
I think the BBC's role is important as well. So I suspect we will
find that unless we enable the BBC to enter this space in a serious
way—which to be honest I do not think it really has yet
done because it has not had the finances to do it—we will
find ourselves stuck in a few years' time with a large number
of households, maybe even the majority, choosing indefinitely
to stay with analogue television. I think that would be a shame
from several different perspectives. That is one of the reasons
why I think the BBC should be given this opportunity to enter
the digital space.
9. If my colleagues will forgive me, I would
just like to follow up what you have said. You have said for some
considerable period in the future in is unlikely that more than
50 per cent will subscribe to the two presently available commercial
subscription services, but nevertheless it is desirable that the
entire population should gain access to digital services. That
being so, may I ask you two questions? First, you have repeated
in your introductory remarks what you say in your Report, namely
that the digital licence supplement should be on a descending
scale and phased out by the time of analogue switch-off. That
being so, by the time that analogue switch-off takes place and
people are wanting to gain access to non-subscription services,
is it not a fact that your digital supplement giving additional
funding to the BBC will have ended anyhow? Secondly, following
from what you have just been saying to Mr Fearn, you have been
talking about the take-up and the projected take-up, but the NERA
report which has been published very recently indeed says your
proposals would have an adverse effect upon the take-up of subscription
and indeed they seek to quantify the adverse effect. I would be
interested in your comments on both of those points.
(Mr Davies) On the first point, which is that the
digital supplement gradually disappears over time, by 2006, which
is more or less the cut-off for our Report, the supplement has
fallen in real terms and nominal terms but it has not disappeared,
and the amount that is generated from the supplement is actually
still running at a fairly stable level because our projections
of take-up are sufficient to compensate for the reduction in the
per head charge. So at least until 2006 we do raise significant
additional sums through the digital supplement. After that, we
do recognise that in the context of the Charter review we will
have to take as a nation a completely new look at BBC funding.
It was actually an attraction to us of the particular formulation
that we put forward that we would not be solving "this problem"—from
the point of view of the BBC—in perpetuity, so that in 2004
or 2005, whenever we come to look at the Charter renewal in a
serious fashion, the then Secretary of State and the Government
and Parliament will have to take a new look at BBC funding and
decide whether the level of funding at that stage is appropriate.
We felt it was better to do it like that than to put in place
a mechanism which would last forever and which would forever boost
the real level of the licence fee which this does not do. That
was an attraction for us in putting together this particular formulation.
The NERA report which you mention is worthy of some comment and
if you do not mind, Chairman, I would like to do this in a little
bit of detail. I will not take too long but it is important, I
think. We asked the commercial alliance repeatedly in the course
of the Panel's deliberations for whatever economic evidence they
had on take-up to sustain their point of view. They gave us a
little bit but essentially almost nothing in the course of the
Panel's deliberations, despite repeated requests. Subsequent to
the Panel's Report, they have published a report by NERA which
has not persuaded me to change my thinking on take-up. I would
say this is for several reasons. First of all, I am not persuaded
that the methodology of what NERA has done is correct. I would
have very much liked this report to have been given to the Panel
while we were sitting so that we could have invited the authors
to explain to us how they did what they did. But on the surface
of what I have read in the NERA report, I think they have substantially
exaggerated the price effects of the digital supplement. That
is the first point. The second point I would make is, if they
are right in suggesting massive price disincentive effects, then
it should pay the commercial alliance (a) to cut their prices
substantially, because they will get a massive increase in take-up
and will get more revenue, and they do not appear to be doing
this, and (b), more speculatively perhaps, it should pay the commercial
alliance to say, "Forget about the digital supplement, please
do not do that since it is so damaging to our revenue, we will
pay that and we will still be billions of pounds better off on
the basis of this NERA report." The NERA report suggests,
from memory, that the commercial sector would lose £5 billion
of additional revenue if a digital supplement were introduced,
and claim that the take-up of digital television would fall by
20 per cent in 2008, and I just regard those numbers as way too
high, I really mean way too high, implausibly too high. I would
ask each member of the Committee to use commonsense on this. In
2008 the digital supplement will be 66p a month; it will be £8
per annum. NERA is expecting us to believe that this will cut
20 per cent, several million homes, from the take-up of digital
TV in that year. I just think this is too high. Last point, quickly,
NERA has looked at the price effects. Obviously when you charge
a price for a service you are likely to see adverse price effects.
However, the BBC will be providing enhanced and improved quality
of service in exchange for that price. As I understand what NERA
has done is they have not allowed for any impact from quality
improvement. Not only do I think they have substantially over-estimated
the price of disincentive effects but I think they have also wrongly
failed to make any allowance for quality effects. Therefore insofar
as I can make sense of what they have said it would not have changed
the Panel's conclusions.
Mr Maxton
10. When you answered Mr Fearn you said that
75 per cent of the population would not have access to subscription
television in the near future. What if BT become a broadcaster
or are allowed to become a broadcaster?
(Mr Davies) Mr Maxton, I may not be up-to-date on
this but when I looked at what BT were likely to offer and were
offering some time back it was a very different service from broadcasting.
It included home shopping, banking and questions of that nature
as well. Certainly if we get to a situation where broadcasting
is primarily done via a telephone line or indeed, as the Chairman
has said on a few occasions, via portable devices, we will be
in a new world.
11. That is one of the points. My colleague
Mr Wyatt says they already are a broadcaster, they broadcast using
the Internet.
(Mr Davies) Yes. I still think there is some distinction
between the Internet and broadcasting. However, I think these
two services are clearly moving closer together and I have an
open mind about the future. It may well be that in as little as
five years' time the two things have become indistinguishable.
What I would say to you at the moment is that I do not believe
that is the case now. I believe there is a clear distinction between
broadcasting and the way people access broadcasting, and the Internet.
These two things are merging, I accept that, but I personally
think that even in five or ten years' time there will be quite
a distinction for most people.
12. I have to say when I came into the House
of Commons this morning between 7.30 and 8.00 I read the news
on the BBC website, I watched the news on the BBC website and
I listened to the Today programme on the BBC website; where
is the difference? I am an anorak, all right.
(Mr Davies) Probably, Mr Maxton, in the way you did
that this morning the difference is rather slim. In fact you may
well have access in a much more convenient way to programmes which
otherwise would have been harder for to you access. Please do
not make me appear to be a believer in old technology, I am not
in any sense. However, I think we should distinguish between those
activities, which may displace reading to some extent, and may
add to your total input of news from broadcasting, and other forms
of television programme. They are beginning to merge but they
are not exactly the same thing for most people today.
13. Did the BBC show you during their inquiry
their development called "Where's Q?", which is basically
Internet television on demand of all their digitalised archived
material?
(Mr Davies) I cannot remember if we saw that specific
development but we have certainly seen similar developments in
the BBC, yes.
14. BBC spent a lot of money on developing that,
on developing their website and yet you make no real suggestions
in your Report. You say, "those people who take up digital
broadcasting should have to pay a supplement." You do not
make any effort to say how the Californian businessman who uses
the BBC website should pay to get news about Britain.
(Mr Davies) Actually, Mr Maxton, we do go into that.
15. Or me, for that matter?
(Mr Davies) We do go into that in some detail. I would
like to make a few points on those subjects. The first is that
we were wholly convinced that BBC Online was an appropriate venture
for the BBC to undertake. It may be that several years ago people
did not necessarily agree with this but I think in the way things
have changed most people now think that BBC Online is indeed an
appropriate venture. The second point was that we thought this
was potentially so important for the BBC now and in the future
that we did not believe that it should be funded by advertising,
although we were under considerable pressure to make the suggestion
that BBC Online should be financed by advertising. The reason
we did not do this was precisely for the reason that we felt that
most of the archive may one day be available via this technology.
If this became the way that most people were accessing BBC programming
we would not want to have transformed the BBC into an advertising
service by mistake. The third area is exactly the one that you
mentioned, which is, as I recall, about half of the hits to BBC
Online are currently coming from overseas. This does appear to
be a subsidy from the UK taxpayer to the foreign user of BBC Online.
We were not happy with this. We wondered how to change that situation.
The way that we have suggested is to have very similar sites to
BBC Online marketed for foreigners, so there would be a BBC America
Online, a BBC Europe Online, a BBC Far East Online and on those
foreign services, which would be housed in BBC Worldwide, we would
be perfectly happy to have advertising and other forms of e-commerce.
We felt that this was a way of charging the foreigner appropriately
for foreign use of the web service while protecting the licence
fee payer in the UK from a wholesale switch into advertising on
the web.
16. There are those, particularly in the States,
who believe Britain is going down a blind alley for digital broadcasting,
the Internet is the future and not digital broadcasting in that
strict sense of the word.
(Mr Davies) Yes. I think we have to wait and see how
this goes.
17. We cannot wait and see. It is happening
now, it is not happening some time in the future. These technologies
are moving so fast it is happening so fast.
(Mr Davies) Yes. I would like to give both technologies
a fair wind and see which one wins out. My own guess is that both
of them have the legs to run for a very, very long time in competition
with each other and that both of them will succeed.
Chairman
18. Following up on two things you said to Mr
Maxton. First of all, let us take this BBC Online, in your Report
it is true you suggest a commercial alternative to be exploited
but that is not going to stop people using BBC Online. BBC Online
has a high international reputation and for the cost of a local
telephone call, which in the United States is nothing, people
can go into BBC Online, so whatever you propose and whether it
is implemented or not at present half the people who make hits
on BBC Online are foreigners who are being subsidised by the licence
payer. I find it difficult to understand the logic of allowing
a service, which is subsidising millions of hits per day by foreigners,
not to take advertising and being subsidised by all the people
in this room. It is not like terrestrial TV services where only
a marginal number of people around the periphery of our island
who do not pay the licence can gain access to it.
(Mr Davies) Chairman, there are two things I think
we need to bear in mind here. This is a very important area and
we did spend quite a lot of time looking at this, and maybe it
should have had a chapter of its own in the Report because I think
people have missed quite a lot of the thinking we did in this
area. In terms of the subsidisation of the foreigner by the licence
fee payer in the UK, the direct cost of making it possible for
foreigners to hit our website in the UK is quite small; it is
meaningful but it is not very large. I think from memory it is
of the order of about £1 million per annum. That is not the
cost of developing content that is put onto BBC Online, it is
the marginal cost of the additional hits we are getting from overseas.
So I think the problem needs to be kept in context. It is a problem
but it is not massive. Secondly, we took a lot of advice, Chairman,
from the BBC, from BBC Worldwide and from other web providers
as well in the big wide world, about whether it was feasible essentially
to direct American users of BBC Online to a website that would
be designed and marketed for them. Clearly, if you are sitting
in Los Angeles, you can either key into BBC America or you can
key into BBC Online, it is entirely up to you, but if the first
of those services is designed for you and is marketed to you and
the second one is not, it is far more likely that you will actually
end up using the first. On the whole we were told that 90 to 95
per cent of all American users would be likely to use BBC America
Online. So while it would not be perfect, we would not differentiate
the market 100 per cent, we would probably do so to a sufficient
degree to make us all feel comfortable.
19. But there is a huge commercial opportunity.
I logged into my computer this morning and I once nearly—I
only got as far as that—bought a book from Barnes &
Noble and they have sent me a message this morning attempting
to sell me more books, and since they keep mine I am quite tempted
to subsidise them. Is it not likely that if BBC Online accepted
advertising—the BBC being what it is, with this enormous
international reputation—all of these merchandising forms
would seek a place on BBC Online and instead of the small subsidy
from the licence payer to these foreign visitors to BBC Online,
these foreign visitors through advertising would be able to provide
a very large subsidy to the licence payer?
(Mr Davies) Yes.
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