House of Commons - Culture, Media and Sport

Select Committee on Culture, Media and Sport Minutes of Evidence

Memorandum submitted by the Commercial Radio Companies Association

EXECUTIVE SUMMARY

The Commercial Radio Companies Association welcomes this opportunity to submit written evidence to the Culture, Media and Sport Committee on the Funding of the BBC.

— We recommend that the Government fulfils the requirement laid down by the Draft Treaty of Amsterdam 1998 and defines its public service remit, with specific reference to the distinction between its "Public Services" and "Commercial Services;"

— We do not believe the BBC requires additional licence fee funds. BBC Digital Radio should use part of its funds already earned through sale of public assets and commercial activities to offer services that are new and exciting and clearly in the public service;

— We support the suggestion that the BBC should allocate funds to the promotion and education of the public in the benefits of digital radio;

— If a digital licence fee (DLF) is agreed to, and payers are to get the services they deserve, and digital providers are to be properly compensated for the extra cost burden imposed on digital consumers, then any funds from a DLF must be ring-fenced specifically for these purposes;

— CRCA would welcome a clear commitment from Government that it will set out its intentions to drive the take up of digital radio;

— We recommend that the Government amends the BBC's Royal Charter to give the National Audit Office inspection rights to audit the BBC's accounts and fair trading practices. This recommendation should be supported irrespective of whether or not the Davies Panel's other recommendations are taken up; and

— We propose that the BBC should sell Worldwide's books, video, magazine and programme sales divisions and license its intellectual property to commercial companies at the best possible price.

INTRODUCTION

The CRCA welcomes the Culture, Media and Sport Committee's invitation to submit written evidence on the Funding of the BBC.

The Commercial Radio Companies Association is the trade body for UK commercial radio. Founded in 1973, it represents commercial radio to Government, the Radio Authority, copyright societies and other organisations concerned with radio. The CRCA also jointly owns Radio Joint Audience Research Ltd (RAJAR) with the BBC. CRCA members include two national commercial radio stations, as well as most local and regional stations. They account for 50 per cent of all the radio listening in the UK. As well as promoting the importance of commercial radio, the CRCA plays an active role in promoting conditions that will enable it to thrive into the future.

CRCA'S OVERVIEW

1. CRCA believes that UK radio listeners currently benefit from the provision of both publicly-funded and commercially-funded radio services and that this should continue. The balance between the two is important and requires, first, that BBC Radio should continue to be funded solely by the licence fee and, second, the independent regulation of both commercial and BBC radio services.

2. CRCA proposes that any supplementation to the licence fee is a matter for Government. If the BBC is not able to operate services efficiently on licence fee funds then it is for the Government to decide whether the BBC should reduce its services or if licence fee income should be raised. Commercial broadcasters are unlikely to support policies that offer a competitor unfair advantages, and we maintain that whether or not the BBC is awarded increased income, then commercial operators should be released from restrictive ownership regulation that prevents them from competing with the BBC. We agree with Lord Bragg's statement:

Should the licence fee be supplemented in order to support the BBC's digital output?

THE BBC'S PUBLIC SERVICE BROADCASTING REMIT

3. The Report of the Independent Review Panel on The Future Funding of the BBC (hereby referred to as the Davies Report) recommends that a digital licence fee (DLF) should be introduced from 1 April 2000 and is payable when a household has installed its first digital receiver.

4. It is difficult to answer the question of the need for a supplementation of the licence fee without first considering what the current licence fee is funding, what it should fund in the future and what funds the resulting aspirations might require.

5. The generosity of the licence fee funding mechanism and the resulting freedom from any commercial imperative have been important in maintaining the BBC's pre-eminence as Europe's most important public broadcaster. The non-supplemented licence fee has played a large part in creating the opportunity to build a brand that the BBC now seeks to exploit commercially both at home and abroad with the Government's help. The creation of new digital services within the BBC is a response to the process of change occurring in broadcasting and communications sectors. Change may be inevitable or so far advanced that it cannot be reversed, but if the creation of new BBC commercial services is to be welcomed and beneficial rather than harmful to the UK communications business, then the legislative framework within which it occurs should be fair to all parties.

6. Under the terms of the 1996 BBC Charter, the BBC is charged with a responsibility to provide sound and television programmes of information, education and entertainment . . . hereinafter referred to as "the Public Services" and to provide sound and television broadcasting services of information, education and entertainment funded by advertisements, subscription, sponsorship, pay-per-view system, or any other means of finance . . . hereinafter referred to as "the Commercial Services".[2] The lack of any further distinction between the two services undermines, in our view, what is valuable and unique about the BBC's public service provision.

7. The BBC currently receives £2,009.7 million from the licence fee, an additional £62.4 million from other income,[3] and £408.9 million from BBC Worldwide[4]. In addition, BBC Radio and Television enjoy free use of spectrum from which they make no payment to the public purse.

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This has an added value for the BBC, bearing in mind that national commercial radio pays £7 million in bid fees and £2 million as a percentage of qualifying revenue (PQR) for the use of spectrum[5]. Terrestrial commercial television paid £265 million and £159 million for 1998 respectively and forecast figures for 1999 are £95 million and £250 million[6]. This is clearly an additional financial benefit to the BBC.

8. Revenue from the licence fee pays for the BBC's public services and revenue from BBC Worldwide has the long term objective to provide "cash to the BBC's licence fee funded services by directly investing cash as co-producer of the BBC programmes, and by returning profits, after tax, to be spent on public service programming".[7] The BBC's trading objectives require the commercial operation to operate at arm's length from the BBC's public service operation and to trade fairly and transparently. The objectives of the two separate operations are less clearly articulated and it is our view that the BBC's public service output is not sufficiently defined in the Royal Charter 1996 agreed by the previous Government. The BBC's public service requirements are, essentially, what the BBC says they are and remain so despite the need for a clearer definition as required by protocol 23 of the Draft Treaty of Amsterdam 1998.[8]

9. Current experience indicates that a balance between the BBC's public and commercial services will be difficult to achieve without making a clear distinction between their separate functions. Due to the lack of a clear definition of the BBC's public service role function as distinct from its commercial services, we believe this weakens the BBC's position as a publicly-funded broadcaster. We share concern with other broadcasters and with telecommunications operators and Internet service providers that, without a clear set of public service objectives, the BBC may lose sight of its public service duties.

10. The Davies Report attempts to address the problems we identify above and makes three recommendations which seek to identify how an appropriate balance between the BBC's public and commercial services can be secured:

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(i) The next BBC Charter Review should consider whether new BBC services continue to fulfil its public service obligations.

(ii) In planning its public service provision, the BBC should define clearly the purpose of each service.

11. We welcome the Davies Report's proposals that the BBC define clearly the purposes of each new public service and investigate whether the new services continue to fulfil those purposes. We also welcome wider consultation of the BBC's plans for new services. However, we think that, if a consultation of planned new services is to be useful, the Government should first require the BBC to define its objectives for its publicly funded and commercial operations, and define how they are distinct from each other.

We do not believe it is possible for the CRCA to propose a digital supplementation to the licence fee without first determining what the current licence is funding. Without a clear understanding of the BBC's objectives for its publicly-funded and commercial operations, we do not see there is a case for introducing a digital licence fee or increasing the current licence fee. Therefore, we recommend that the Government fulfils the requirement laid down by the Draft Treaty of Amsterdam 1998 and defines its public service remit, with specific reference to the distinction between its "Public Services" and "Commercial Services".

CREATING THE RIGHT BALANCE IN MEDIA MARKETS

12. The Davies Panel's proposals on BBC public service obligations seek to create the right environment for buoyant broadcasting and new media economies. The Davies Report suggests that creating the right competitive environment requires charging the BBC with providing services which are distinctive and do not harm competitors by chasing ratings, and at the same time protects the BBC from relegation to the "kind of irrelevant box which `public service broadcasting' occupies today in the US"[10]. CRCA agrees with these objectives. We welcome the BBC's ambition to "use its ability to reach into every home to engage audiences in new experiences and to act as a guide in a world of abundance"[11]. However, we share the Panel's view that the BBC spends too little effort on achieving universal reach and too many resources chasing ratings[12]. The fact that the commercial radio sector has a larger reach and share of audience than BBC Radio would indicate that BBC Radio fails to achieve either goal"[13].

13. The Davies Report's attention to the BBC's public service ambitions is a welcome attempt to create "a level playing field"[14] between the BBC and its competitors. The BBC's impact on competitive media markets and its distortion of those markets through its unique funding mechanism gives us cause for concern. The Secretary of State for Culture, Media and Sport recently argued that Government will tolerate "a degree of market distortion" in media markets[15]. Further clarification on the amount of market distortion acceptable to Government would be helpful, and, whilst we accept that the BBC's competitors complain of market distortion because we have "more than one eye on our own interest in arguing this case,"[16] we question the extent to which commercial media businesses can be expected to prosper on an un-level playing field.

14. In our response to the BBC Funding Review, CRCA raises the following concerns with regard to the question of whether the BBC is trading fairly and openly in commercial markets:

— we are concerned that the absence of external, independent regulation of the BBC contradicts the claim that the BBC is trading transparently;

— under current operating arrangements we see no guarantee that the BBC is efficiently managing its accounts;

— we see no evidence of the arm's length relationship between the BBC's publicly-funded and commercial services and are concerned that the BBC's publicly-funded operation could be cross-subsidising BBC Worldwide. The BBC offers no proof that commercial returns from BBC Worldwide is invested in making new programmes which will be shown first on licence-funded services. The BBC offers no reassuring evidence that staff are not cherry-picking projects for BBC commercial services at the expense of the licence fee payer. We also believe the arm's length relationship between the two operations is further eroded if a single programme is made to be shown on both a publicly-funded and a commercial network;

— we are concerned that the BBC is competing unfairly by the extent to which it cross-promotes its television, radio and Online services. While we recognise that the BBC is allowed to advertise its services, we question whether the BBC should be able to employ cross-promotional muscle as much as it does;

— we are concerned that advertisements for BBC services broadcast by the BBC are not subject to the same rules that apply to commercial operators. Commercial television is prevented through the ITC Code of Advertising Standards and Practice from broadcasting an advertisement for Chris Evans' breakfast show on Virgin Radio immediately following his Channel 4 programme. In contrast, a television programme presented by Zoe Ball is followed by an advertisement for her Radio 1 breakfast show;

— we question whether the BBC should be using licence fee money to bid for expensive rights, and we would go so far as to suggest that the BBC, by drawing on its funding resource to put up public funds against commercial operators bids, is escalating overall rights costs unnecessarily; and

— we also question whether the BBC should be allowed to spend public money on driving up payments to talent in order to gain commercial dominance. There is some concern that the BBC is exploiting its non-commercial advantage to drive up costs.

15. Clearly CRCA has a number of concerns that point to difficulties in achieving a level playing field with a publicly-funded broadcaster. The BBC Funding Review attempts to identify ways of removing unfair competition in media markets whilst at the same time protecting the benefits the BBC contributes towards those markets. The Davies Panel offers proposals that will alter the behaviour of the BBC thereby creating fairer markets. CRCA would like to suggest that an alternative approach would be to deregulate the BBC's competitors so they have the strength to compete with the BBC and the strength to invest in the same costly new technologies. From our perspective, it is crucial that UK commercial ownership rules should be both changed and lightened. The Davies Report suggests in Annex 8 that the importance of the BBC in the broadcasting market is necessary to "act as a counterweight to the private concentration of ownership"[18].

It is our view that commercial media ownership rules prevent concentration of private ownership in media markets and further protection of democratic objectives by the presence of the BBC in commercial markets is unnecessary.

THE DIGITAL LICENCE FEE AND DIGITAL RADIO

16. With regard to the argument we give in the previous section, it follows that CRCA does not accept that the BBC needs more funds to provide digital services. Nevertheless, the Davies Panel accepts, at least in part, the BBC's case for additional funding. We have some concern that the introduction of a DLF sets a precedent whereby the Government imposes a cost burden (however small) on consumers after commercial enterprise has invested in roll out of new technology.

17. The Panel proposes that the DLF is ear-marked for digital service funds with the desired effect of driving take-up nationwide of digital broadcasting. We welcome the idea that BBC funds should be transparently circumscribed specifically for digital services as it is our concern that the BBC is not investing in BBC Digital Radio as much as it should. The development of BBC Digital Radio is sorely in need of extra investment and the DLF may go some way to speeding up investment by UK households in digital radio services. It does not follow, however, that the necessity of hypothecated funds demands the introduction of the DLF.

18. Whilst CRCA does not agree that extra funds are necessary to fund the BBC's digital services, we do agree that increased funds should be spent on BBC Digital Radio. However, if we are to remain convinced by the BBC's argument that it is programmes, not delivery systems, that encourage people to invest in new technology then the services the BBC proposes must fulfil the following objective:

The BBC's range of new services on its digital radio network include:

— continued simulcasting of the main networks;

— music plus—for the 25-44 year old audience group;

— Radio 5 Live Sport and Radio 5 Live Plus;

— BBC Parliament audio service; and

— broadcasting Asian Network across Britain.

In addition to these services the Davies Report cites that the BBC is planning a BBC Black Music channel.[20] A number of these stations will already be available through the analogue network, and the additional music services will use BBC Radio archive footage. Consequently it is not evident to the CRCA that the BBC will be investing DLF funds in "new, landmark" radio programming.

19. CRCA agrees the BBC should invest in digital. No-one proposes, in the commercial or public sector, that the BBC should be, as Davies puts it, "confined to a slow demise, trapped in a world of disappearing old technology".[21] We argue that the BBC has already been given considerable advantage to resist a slow demise. Selling off the BBC's transmission network; setting up the BBC's commercial services; and allowing the BBC to offer online services when its rival, BT, is prevented by law from broadcasting until 2001—these are all mechanisms that were brought in with no independent public consultation to ensure the BBC remains buoyant in the digital future. We question whether the BBC could have provided better digital services with the funds it already has; Davies himself says "it must be said that some of the BBC's digital offerings have been distinctly threadbare".[22]

— CRCA welcomes the idea of allocating circumscribed funds to BBC Digital Radio. Its commercial digital radio competitors are looking to BBC Digital Radio to offer services that are new and exciting and clearly in the public service.

— CRCA supports the suggestion put forward by the Davies Panel that additional funds are allocated to the promotion and education of the public in the benefits of Digital Radio.

— If the current licence fee is increased then any additional funds must be ring-fenced specifically for the reasons given for the relevant increase.

20. Whilst the Davies Report's proposals have fuelled a welcome discussion of the mechanisms necessary to nurture the difficult transition from analogue broadcasting to digital broadcasting, CRCA is concerned that the debate pays little or no attention to digital radio. Discussion of analogue radio switch-over has understandably taken a secondary role to discussion of switch-over of analogue television as digital television will be the first service to transfer entirely to digital networks. However, there is a danger that policies intended to aid take up of digital radio are neglected or worse, policies on digital television are assumed to apply to digital radio.

21. The Secretary of State, the Rt Hon Chris Smith MP, recently stated his intention to provide a clear framework for the move from analogue transmission to digital transmission so that television broadcasters "can plan investment with confidence."[23] The Secretary of State acknowledges that "Government also has an important role to play" along with industry in driving the digital switch over and he identifies the Government's primary responsibility as one which ensures "consumers are fully informed and effectively protected, particularly those who simply want to continue to receive free-to-air channels". This primary responsibility depends rather on the fulfilment of certain goals by digital broadcasters:

CRCA agrees with the Secretary of State on every point. We would now like to contribute towards a similar debate on the best way to drive the move to digital audio broadcasting.

22. Commercial radio operators are making every effort to tell listeners what digital radio has to offer. The UK Digital Radio Forum includes both CRCA members and the BBC with the purpose of looking at how the radio sector can best encourage listeners to invest in digital radio. Initiatives include a joint working party, involving representatives from GWR, BBC and UK radio manufacturers. The party has visited radio manufacturers in Japan and attended the IFA trade fair in Berlin with the intention of encouraging the manufacture of lower-price digital radio sets. Commercial operators are also talking to data services suppliers to explore new ways to offer listeners news and information in text.

23. The transition from analogue to digital broadcasting requires careful consideration. Radio is important to listeners with all radio listening reaching 89.7 per cent of UK adults every week (weekly reach for all commercial radio is 66.2 per cent; weekly reach for all BBC Radio is 63.5 per cent).[25] There is virtually no difference in the relative importance people attach to television and radio as an important part of their lives. (40 per cent agree TV is an important part of their life compared with 38 per cent for radio).[26] The similarities between television and radio end here however. The transition to digital radio will not duplicate the take up of digital television services and it is important that the distinction between the two forms of broadcasting is recognised. First, it is assumed by commercial operators that digital radio will attract audiences by offering improved reception and new services. There are no plans to offer subscription services or pay-per-listen services, and all commercial digital operators will continue to offer free-to-air broadcasting. Second, all digital radio services will be available through a digital radio set. Digital radio operators will not be subject to the platform wars currently being waged by digital television operators. In conclusion, we wish to draw the Committee's attention to these three important points: commercial digital radio investors are working hard, sometimes with the BBC, to identify the best ways to encourage listeners to invest in digital radio; radio is important to listeners; and digital radio is not like digital television. Our members seek reassurance from Government that it is aware of these three considerations and that it will head up a discussion of the conditions that need to be satisfied before a switch-over date for digital radio can be considered.

— CRCA would welcome a clear commitment from Government that it will set out its intentions to drive the take up of digital radio.

Should the National Audit Office be granted inspection rights to carry out audits of the BBC's accounts and its fair trading arrangements?

24. CRCA welcomes the Davies Panel's suggestion that the National Audit Office (NAO) should be empowered (by an amendment to the BBC's Charter) to carry out periodic financial audits of the BBC's accounts and its fair trading arrangements.[27] It has also been suggested by Gavyn Davies that the Panel's recommendations should be recognised as a package to build public confidence. In light of this suggestion it would be simple to request any DLF is only imposed on digital consumers if surety is given that it is coupled to financial scrutiny by the NAO. Rather than a package of proposals, we propose that financial scrutiny of the BBC's accountability to the public is long overdue and we see every reason why the NAO should look into whether licence fee payers are getting value for money, and no good reason why it should not. Irrespective of whether the Panel's other recommendations are taken up by Government, we maintain that scrutiny of the BBC's accounts by the NAO should be introduced at the first opportunity.

25. The BBC has expressed concern that granting inspection rights to the National Audit Office would compromise its independence from Government:

Contrary to the BBC's fear of political interference, we see no reason why the NAO would influence the BBC's output politically or otherwise. The statute governing the NAO prevents it from commenting on areas of policy; does not allow it to investigate subjective objectives; and guarantees it remains at arms length from Government. We do not see that the distance between the NAO and Government is less than that between the BBC Board of Governors and the Government. The NAO's Comptroller General is appointed by Parliament and not by Government; for appointment of BBC Governors, the reverse is true.

26. The BBC's anxiety that it will be subject to political interference from Government depends upon the degree of influence imposed onto the organisation by the Public Accounts Committee. The Public Accounts Committee reports on the recommendations put forward by the NAO's Comptroller General, and it is at this stage in the process that the BBC fears interference from Government on its objectives. CRCA believes the BBC's fears are unfounded. First, the Public Accounts Committee is similar to the NAO in that it has no executive powers—it can only make recommendations. Second, it can only make recommendations that are unanimously held by the Committee, this rule is designed specifically to ensure that party political objectives do not influence the Committee's work. Third, terms of reference for the audit of the public organisation subject to scrutiny are always set by agreement between the organisation and the NAO prior to investigation. This mechanism should effectively restrict any opportunity for political hijacking to occur.

— CRCA recommends that the Government amends the BBC's Royal Charter to give the National Audit Office inspection rights to audit the BBC's accounts and fair trading practices. This recommendation should be supported irrespective of whether or not the Davies Panel's other recommendations are taken up.

Should the BBC sell off a 49 per cent stake in its commercial arm, BBC Worldwide, to private investors?

27. In our submission to the Davies Panel we recommended that BBC ownership of commercial services should be kept to the minimum and that such services should be separately managed, housed and regulated (by regulators responsible for the UK commercial broadcasting sector). Our view remains unchanged and we suggest that the principle that BBC services cannot be a mixture of publicly-funded and commercially funded broadcasting applies to the partial privatisation of BBC Worldwide.

28. We agree with the Davies Report's conclusions that BBC Worldwide, as it is organised now, has distinct disadvantages. (It does not depend for its survival on the exercise and reward of entrepreneurial skills, it has an aversion to financial risk, is constrained by the PSB requirement and lacks marketing expertise)[29]. However, we do not see what benefits would flow from selling off a minority stake in the enterprise. Instead we recommend selling off Worldwide's books, video magazine and programme sales divisions for the price their existing goodwill and rights will command. Thereafter the BBC should license its intellectual property to whichever company bids highest for the relevant exploitation. At a stroke this will both ensure that BBC assets will realise full market value and end accusations of unfair trading. We further recommend that the same formula should be applied to the BBC's commercial online activities.

— We propose that the BBC should sell Worldwide's books, video, magazine and programme sales divisions and license its intellectual property to commercial companies at the best possible price.

October 1999

1 Lord Bragg speaking in the House of Lords debate, Public Service Broadcasting, Hansard, 3 March 1999: 1667. Back

2 Terms of BBC Charter, 1996: 3a. Back

3 Funds are raised from various sources including the Open University Production Centre and the hire of BBC Resource facilities. Back

4 BBC Annual Report and Accounts 1997-98: 60-61. Back

5 Radio Authority figures for year end 31 March 1998. Figures for year end 1999 are 1998 plus RPI. Back

6 ITC (Independent Television Commission) figures. Back

7 BBC Annual Report and Accounts 1997-98: 30. Back

8 Council of the European Union, Amsterdam European Council Draft Treaty, June 1997. "The provisions of the Treaty shall be without prejudice to the competence of Member States to provide for the funding of public service broadcasting in so far as such funding is granted to broadcasting organisations for the fulfilment of the public service remit as conferred, defined and organised by each Member State." Back

9 The Future Funding of the BBC, Report of the Independent Review Panel, 28 July 1999 (DCMS): 148. Back

10 The Future Funding of the BBC, Report of the Independent Review Panel, 28 July 1999 (DCMS): 139. Back

11 The Future Funding of the BBC, Report of the Independent Review Panel, 28 July 1999 (DCMS): 134. Back