Memorandum submitted by PACT

Executive summary

1) The UK has a public service broadcasting system that is envied around the world, with a range of broadcasters and programme makers providing the public with high quality television that meets such public service goals as educating, fostering citizenship and representing diverse viewpoints. At the heart of this system is UK-made programming, as opposed to imported shows. UK-made programmes are integral to public service broadcasting's ability to help us understand ourselves, our society, and, at its best, unite us - and being made in the UK is rightly one of the defining characteristics of a public service programme.[1]

2) Public service programming now faces well-documented funding issues. With pressures on advertising revenues increasing, Ofcom's ongoing second review of Public Service Broadcasting predicts a funding gap of up to Ł235m per annum by 2012 just to maintain current levels of UK-made, public service programming.[2] Channel 4 and ITV have already made widely-reported cuts in public service programme budgets such as news, programming from the devolved nations and English regions, and children's content. Even the BBC, relatively well protected due to its funding from the licence fee, has made cuts in core programming areas following the last Charter settlement.

3) The industry must find self-help measures as far as possible to help alleviate this pressure, and it is therefore increasingly important that the BBC maximises the commercial value of its existing assets - i.e. its programmes. Resulting revenues should be re-invested back into making new UK programmes that deliver the goals of public service broadcasting. In so doing, the BBC returns an added value to licence fee payers, who will see those programmes on their television screens.

4) Under the BBC Charter, the BBC's Public Purposes are of overriding importance, and commercial activities are secondary.[3] It follows that commercial activities should exist to maximise the revenues that can be reinvested in the pursuit of these Public Purposes - i.e. in the creation of public service programming and content that contributes to this pursuit.[4]

5) This is reflected in the BBC Trust's guidance for the strategy of BBC commercial activities, which states:

"At the highest level, the Trust will be concerned with the objective that the BBC should relieve pressure on the licence fee by seeking to maximise commercial revenue within appropriate areas and by returning value to licence fee payers by reinvesting profits in the BBC's Public Services."[5]

6) We are concerned that the BBC is not maximising the potential of these assets on a number of counts, and welcome the inquiry by the Culture, Media & Sport Committee. Firstly, BBC Worldwide currently has an automatic and exclusive "first look" to buy all programmes made by BBC in-house production departments. It then exploits these programmes commercially (for example, by selling Doctor Who to broadcasters and BBC Worldwide's own wholly-owned channels in other countries), returning a share of profits to the BBC. However, many companies in the private sector perform the same function as BBC Worldwide with regard to programmes outside the BBC's in-house production departments. Many of these third-party distributors would bid against BBC Worldwide for the right to license programmes made by BBC in-house if the BBC allowed them to, and the resulting competition for rights to BBC shows might well yield a higher return for the BBC. When high profile television shows are auctioned on the open market, it is not uncommon for bidding wars to take place. This has occurred when the BBC has commissioned programming from external suppliers, who have then auctioned the international rights to the show to the market, with the result that private sector distributors have outbid BBC Worldwide.[6]

7) Opening up in-house programming to such competition could potentially generate significant additional income for the BBC, which could then be reinvested in public service programme-making. The BBC invests Ł800m in in-house production a year compared to around Ł400m on external programming. Much of this will comprise high profile shows that are highly attractive to the market, given that they will have built audience awareness on BBC1 and BBC2, two of the UK channels with the highest audience share.

8) Just as importantly, without auctioning programmes on the open market, the BBC cannot be confident that it is realising the maximum possible added value on its assets. This is one area where the BBC's regulations are inadequate. Under the Fair Trading Guidelines, the BBC is required to charge BBC Worldwide prices that are in line with the market for its programmes; yet, for the majority of in-house programmes, the BBC has no way of accurately knowing the market rate as it has never tested what the market is willing to pay. To ascertain the correct market rate, the Fair Trading Guidelines merely task the BBC with occasionally benchmarking prices. This is a wholly unsatisfactory way to gauge prices for television programmes, which are not homogenous, exist in a fast-changing market, and may be subject to commercial confidentiality. It means that, under the current system, the BBC cannot guarantee that it is securing the maximum possible added value from its programme assets when its passes them on to BBC Worldwide.

9) The BBC has previously objected to an open auction system, whereby it would offer a programme to the market so that private sector companies could compete for it alongside BBC Worldwide, on the grounds of efficiency. We reject this: distributors in the commercial sector routinely conduct such auctions to sell programmes, as has the BBC itself, as we will outline.

10) We also have concerns over the transparency of the BBC's commercial activities in a number of areas, including where profits that accrue from exploiting programmes are re-invested. As we have noted, this should be into the pursuit of the BBC's Public Purposes, and in particular into the creation of public service content that delivers these Purposes. Currently, it is not clear where those profits are spent.

11) Nor is BBC Worldwide obliged to make public what it is paying for rights to BBC in-house programming. The Fair Trading Guidelines call for "transparency and accounting separation" between the BBC's public service activities and BBC Worldwide.[7] However, they do not require an appropriate level of transparency for transactions within BBC Worldwide (i.e. between its divisions) that may have a bearing on the prices its pays the BBC or third parties. BBC Worldwide operates a portfolio of 29 channels around the world, and will pass on programmes that it buys from the BBC or other parties to these channels for broadcast for a fee. This fee is not disclosed in BBC Worldwide's annual accounts, and it is unclear what value is attached to the programme when BBC Worldwide passes it on to its wholly-owned channel, and whether this is a genuine market rate. This means that BBC Worldwide may allow its channels to underpay for BBC in-house programming, which it in turn has acquired at relatively low cost through its exclusive first-look arrangement.

12) We have similar concerns regarding the transparency of BBC Worldwide's investments in BBC programmes at production stage (as opposed to its purchase of completed programmes). This is a common practice and, in exchange for its investment, BBC Worldwide will take rights to the show for sale at a later point. The BBC will use the investment from BBC Worldwide to augment its core programme budget and fund the creation of a programme. We have no objection to the principle of BBC Worldwide investing in BBC shows at financing stage - indeed, BBC Worldwide revenues should be reinvested in the BBC's core activity of making UK public service programmes. However, the BBC does not make clear how BBC Worldwide's investments are spread between in-house programmes and external BBC commissions, or the proportion of the budget BBC Worldwide pays for investments in in-house programmes compared to external programmes. Were in-house producers securing a greater level of investment than external producers who have been commissioned by the BBC, they could have an unfair advantage when competing with external suppliers for BBC commissions. This would potentially undermine the BBC's stated policy of commissioning the best ideas, no matter where they come from, so that the licence fee payer benefits from the most diverse, engaging and innovative mix of shows.[8]

13) In terms of its regulatory framework, the BBC Charter and Agreement set out very broad requirements requiring the BBC to focus on its Public Purposes, and the Trust to be mindful of the BBC's competitive impact and to adopt a statement of policy on fair trading.[9] This is then implemented by the Trust's Fair Trading Policy and BBC management's Fair Trading Guidelines, which are approved by the Trust. Under the Fair Trading Guidelines, BBC Worldwide is required to meet each of four Commercial Criteria. Any BBC commercial activity must adhere to all four criteria, which are:

· "Fit with the BBC's Public Purposes;

· Not jeopardise the good reputation of the BBC or the value of the BBC Brand

· Exhibit commercial efficiency; and

· Comply with the Trust's Fair Trading Policy, the BBC's Fair Trading Guidelines and, in particular, avoid distorting the market."[10]

14) We are concerned that BBC Worldwide is failing to meet these criteria on a number of counts, and in some cases is in clear breach, particularly in light of its aggressive expansion strategy over recent years.

Fit with the BBC's Public Purposes

15) We cannot see how several of BBC Worldwide's current activities - including its investments in consumer magazine publishing in India, its acquisition of Australian book publisher Lonely Planet, and its acquisition of ownership stakes in production companies overseas - bear any meaningful relation to its Public Purposes. This creates several dangers, including an unnecessary financial and reputational risk to the BBC.

Reputation of the BBC

16) As noted above, the BBC's involvement in a range of commercial ventures that are increasingly far removed from its core programming creates a danger of damaging the BBC's reputation as the nation's main public service broadcaster. As we detail, for example, BBC Worldwide's current investment portfolio includes an ownership stake in the Freehand Group, the Australian production company behind Joker Poker, a well-known game show in Australia sponsored by an alcohol company and a casino group (in return for being associated with the show, promoting their brands in the show, and/or exposure in its publicity material). As an investor in Freehand, therefore, the BBC logo is clearly visible (as BBC Worldwide) on Freehand's website, next to a publicity still from Joker Poker featuring a poker table with the logo of a casino group on it.[11]

17) Joker Poker is an example of "branded content" - i.e. where an advertiser sponsors or invests in a programme in return for exposure of its brand either within the programme or its publicity material, or both. We understand that Joker Poker would be classified in the UK as product placement, and would therefore be illegal for the BBC to make it in the UK. The BBC's Editorial Guidelines, to which the BBC Trust's guidance requires commercial services to adhere, state: "We must never include a product or service in sound or vision in return for cash, services or any consideration in kind. This is product placement. It is illegal to make any such arrangements in the EU."[12]

Exhibit commercial efficiency

18) This section in the Fair Trading Guidelines requires BBC Worldwide to report annually to the Trust on the performance of each of its commercial Services. However, performance is judged against an extremely broad set of investment criteria in the Trust's Commercial Protocols, including setting the minimum investment level for referral to the Trust's Finance and Strategy Committee at Ł50m, an extremely high threshold in comparison to the commercial sector.[13] Additionally, as we have noted above, BBC Worldwide does not make public the individual performances of its 29 UK and overseas channels, nor how much they pay for programmes acquired from the BBC. BBC Worldwide may be allowing its channels to underpay for BBC in-house programming, which it in turn has acquired at relatively low cost through its exclusive first-look arrangement.

Conclusions and potential solutions

19) In our view, therefore, the current regulatory and governance system of the BBC is failing on several counts. In some instances, BBC Worldwide appears to be in clear breach of the BBC's Commercial Criteria, such as in the case of investments overseas that do not fit with BBC Public Purposes and/or risk damaging the BBC's reputation. In other cases, the Fair Trading Guidelines are framed so loosely, or require inappropriate practices such as benchmarking prices to try to establish market rates, that it is almost inevitable that some of the BBC's commercial activities will be inappropriate. Were a robust governance process in place it might be possible to require the BBC's commercial activities to adhere to the spirit of the BBC Charter even if they were loosely worded. However, with members of the BBC Worldwide board sitting on the BBC board, and vice versa, there is no clear separation between the two (which in itself is a breach of the Fair Trading Guidelines).[14]

20) We suggest a range of measures to address these issues, including:

· The BBC Trust should amend its Fair Trading Policy and the BBC its Fair Trading Guidelines to ensure that the BBC maximises the added value of its assets. Instead of allowing the BBC to gauge a market rate for a programme by benchmarking, it should be required to put the rights to all in-house content out to tender in the open market so that it can guarantee that it is securing the maximum added value from their commercial exploitation on behalf of the licence fee payer. This should apply to finished programmes and to programmes where the BBC seeks a distributor as part of the financing package prior to or during production.

· BBC Worldwide should be required by the BBC Trust of divest itself of ownership stakes in businesses based overseas where it cannot demonstrate a clear and meaningful link with its Public Purposes.

· The BBC Trust's Fair Trading Policy and the BBC's Fair Trading Guidelines should be amended to require that the BBC's commercial activities are subject to far greater transparency. This should include a greater level of transparency for investments, including reducing the Ł50m threshold referred to above. Also, greater transparency is important in prices that BBC Worldwide pays for rights to programmes from the BBC's Commercial Agency, and in terms of investments at production stage in in-house compared to external programmes commissioned by the BBC. We are not aware of any public document detailing at any level the prices paid by BBC Worldwide to the BBC or third parties. If these are contained with PricewaterhouseCoopers' annual audit on behalf of the BBC Trust, this, or the relevant sections, should be made public.

· Additionally, the BBC should provide greater transparency in where profits that accrue from the exploitation of its assets are invested. This added value should be re-invested clearly in public services activities that fulfil the BBC's Public Purposes, particularly UK programme making.

· The BBC Trust should conduct a root-and-branch, public review of regulations and governance for BBC commercial services. The Trust is required to conduct a comprehensive compliance review involving public consultation every three years,[15] but we ask the Committee to recommend that the Trust reviews BBC commercial activities not just in terms of the letter of the BBC's (flawed) guidelines, but also in the light of the BBC's high-level goals in the BBC Charter that require the BBC's Public Purposes to take priority over commercial activities - which should entail maximising the added value of BBC assets for reinvestment in the pursuit of the Public Purposes. This should be explicit in the Fair Trading Policy and Guidelines.

21) There is inevitably tension between any policy of maximising revenues and the BBC's status as a publicly-funded institution. These potentially conflicting incentives create the risk of damaging the BBC's reputation as a public service broadcaster, a loss of focus on the BBC's Public Purposes as laid out in the Charter,[16] and competition issues, amongst other matters. Adding to this tension is the existence, in BBC Worldwide, of a standing, commercially-driven subsidiary with its own cost base to justify.

22) However, the current system is offering the worst of both worlds: the BBC's commercial activities are exceeding their remit and running the risk of damaging the reputation of the BBC; but at the same time they are providing no guarantee that they are maximising profits on behalf of the licence fee payer, and in our view are failing to do so.

Introduction and market overview

1) Pact is the trade association that represents the commercial interests of the independent production and distribution sector. We have more than 600 member companies across the entire UK, involved in creating and distributing television, film and interactive content.

2) We welcome the opportunity to respond to this inquiry by the Culture, Media & Sport Committee, and will focus on the activities of BBC Worldwide. This section of our submission contains a brief overview of the export market for UK television programmes and an outline of the market and business model for exploiting the rights to UK programmes around the world. The sections after this outline our response to the Committee's areas of interest as laid out in its formal announcement of the inquiry.

3) The independent production sector has a turnover of more than Ł2 billion per annum, and accounts for around half of all new UK programmes broadcast each year.[17] Broadcasters' in-house production departments account for most of the remainder.

4) This programming is a valuable form of intellectual property (IP). The rights to broadcast or remake these programmes are sold around the world by distributors, which effectively act as middlemen between producers (either broadcasters' in-house production departments or independent companies) who create the content, and broadcasters in other countries that buy the IP rights so that they can air a programme.

5) Rights are typically defined by country, but also by the manner of exploitation (e.g. television or DVD). Overseas broadcasters will buy the right to, for example, broadcast a UK programme in Germany. Broadcasters or producers in other countries will also buy the right to remake a UK show for a local audience - a practice known as formatting.

6) The UK is a leading exporter of television programmes. UK programmes have more than 13% of the global television exports market - second only to the far larger US industry, as the table below shows.[18]

Figure 1: Share of global television export market by country

Source: Rights of Passage 2007, TRP for Pact

7) The UK is also the global leader in exploiting format (remake) rights, with a 53% share of the formats market, far larger than that of the US, as illustrated below.[19]

Figure 2: Share of global television format market by country

Source: Rights of Passage 2007, TRP for Pact

8) BBC Worldwide is the UK's largest distributor, with exclusive access to programmes made by BBC in-house production departments via a "first-look" arrangement. BBC Worldwide will also seek to acquire programmes made by external suppliers for the BBC and other broadcasters, on commercial terms.

9) Many companies in the commercial sector perform an identical function to BBC Worldwide, acquiring the rights to programmes from other broadcasters and also from independent producers. Under the Codes of Practice/Terms of Trade introduced in the 2003 Communications Act, independent producers retain control of certain secondary rights to their programmes, including the right to exploit that programmes in overseas market. They typically license this right on to a distributor, either BBC Worldwide or a distributor in the private sector. The commissioning broadcaster will, however, receive a substantial share of any revenues that are generated as a result of this exploitation, regardless of who distributes the programme.

10) Following the creation of the Codes of Practices, independent producers and distributors have noticeably developed the UK television export market, helping establish the UK as the world leader in format exports, for example.

11) All distributors will charge a fee and deduct costs before returning the remaining revenues to the rights holder (this applies to BBC Worldwide, which will deduct such charges before returning profits to the BBC, and commercial sector distributors).

Response to Committee's areas of inquiry

The benefits and opportunities offered by the BBC undertaking a range of commercial activities in the UK and abroad

1) The UK is widely recognised as having one of the most vibrant, successful and creative television production sectors in the world. Decade after decade has produced programmes that have challenged and influenced UK society. Such home-grown programming is at the heart of public service broadcasting, essential to delivering the goals of public intervention in this area. UK programming is integral to informing ourselves about our society, representing diverse viewpoints within the UK, including the devolved nations and the English regions, and to interpreting international issues by using appropriate reference points. In this regard, UK-produced programming is fundamental to fulfilling the Public Purposes of the BBC under its Charter, and the four public service broadcasting purposes outlined by Ofcom.[20]

2) Ofcom's recent audience research shows that the public places great value on programmes made in the UK, with 83% of people saying that it was important or very important that programmes made in the UK and reflecting life in the UK are shown on the main television channels.[21]

3) It is precisely this type of programming that is currently under threat. Ofcom has identified a shortfall in investment in public service programming of between Ł145m and Ł235m a year by 2012, largely due to the migration of advertising revenues away from the licensed commercial public service broadcasting channels (ITV1, Channel 4 and Five) towards the so-called multi-channel broadcasters on digital, cable and satellite platforms. The BBC is also under pressure, and has announced programme budget cuts as part of a cost saving exercise following the last Charter settlement. These broadcasters are responsible for around 90% of all investment in new UK television programming.[22]

4) Commercial exploitation of BBC programmes therefore has an increasingly important role to play. Commercial exploitation should maximise the value of assets that the public has paid for - i.e. BBC programmes - and return the benefits to the public in the form of additional investment in public service programming, providing added value for the licence fee payer.

5) Under the BBC Charter, the BBC's Public Purposes are of overriding importance, and commercial activities are secondary.[23] In our view, it follows that commercial activities should exist to maximise the revenues that can be reinvested in the pursuit of these Public Purposes - i.e. in the creation of public service programming and content that contribute to this pursuit.[24]

6) This is reflected in the BBC Trust's guidance for the strategy of BBC commercial activities, which states:

7) The BBC has previously committed to maximising added value under its Fair Trading Commitment,[26] and this aim was also outlined in the Government's White Paper during the last Charter review process, which stated that the BBC's commercial services had two roles in an international context: "Better promotion of UK culture, talent and intellectual property overseas; added value returned to licence fee payers."[27]

8) Key to our concerns, however, is whether BBC Worldwide is always the best vehicle through which the BBC should seek to maximise returns, and where those returns are being invested within the BBC.

The potential risks to the BBC, licence fee payers and other stakeholders

Reputation

1) The BBC has a worldwide reputation as a trusted and independent source of content. The BBC's Editorial Guidelines rightly warn that the BBC must be seen to be impartial and not influenced by commercial third parties at all times - including when engaging in commercial activities. They state:

"The BBC's global reputation is based on its editorial integrity and independence. Our audiences need to be confident that our decisions are influenced neither by political or commercial pressures, nor by any personal interest. We must not undermine these values by any actions which could bring the BBC into disrepute."[28]

Risk to licence fee funds

2) In engaging in commercial activities there is a potential risk to licence fee funds. It is important therefore that the BBC ensures that there is adequate separation between its public service (licence-fee funded) activities and its commercial services such as BBC Worldwide, so that the BBC is not liable for BBC Worldwide losses.

3) In addition, the BBC can help minimise the risk to licence fee funds by ensuring that its commercial activities are based on exploiting its existing programmes assets, rather than making speculative investments in unrelated areas. In addition to the resulting financial risk, this increases the danger of the BBC having an undue and negative market impact.

Market impact

4) The BBC is a substantial public intervention in the market. It is the sole recipient of funds from the licence fee, which represents around 25% of total revenues in the television sector (including, for example, advertising and subscription revenues). As pressure on advertising revenues amongst commercial sector broadcaster increases, the BBC is likely to be in an ever stronger position due to the exceptional nature of its funding.

5) There is therefore a risk that the BBC's commercial activities will distort or dampen competition in the commercial sector and use licence fee funds for commercial purposes, which would potentially breach European rules on State Aid, as the licence fee would count as public funding.[29]

6) These issues are at the heart of the BBC Fair Trading Guidelines, which require the BBC to be mindful of its impact on competition and ensure that its commercial activities do not have an undue advantage because of their parentage. The Guidelines state that the BBC's commercial activities must not be: "given unfair commercial advantage which could unduly and negatively influence the market." [30]

Focus on Public Purposes

7) The BBC's most important activities should be fulfilling its six Public Purposes as defined by its Royal Charter.[31] This priority in enshrined in the BBC Charter, which calls for the BBC's "main object" to be the Public Purposes,[32] and is reflected in the BBC's Fair Trading Guidelines, which state: "The BBC's primary purpose is the promotion of its Public Purposes through the provision of output that informs, educates and entertains."[33]

8) The BBC's commercial activities are therefore required to be closely linked to its core Public Purposes. The BBC's Charter Agreement requires that commercial activities "fit with" its Public Purposes.[34] This is also expressed in the BBC's Fair Trading Guidelines, which state that any commercial activity must: "fit with the BBC's public purposes."[35]

9) Yet the BBC's commercial activities have in Pact's view strayed into areas that are unrelated to its Public Purposes. As we will detail in the next section, BBC Worldwide is, for example, involved in consumer magazine publishing in India and has acquired Australian-based travel publisher Lonely Planet at a cost of around Ł90m.

Conflicting incentives

10) As we have noted above, the BBC's primary concern should be its Public Purposes. In our view, it follows that commercial activities should exist to maximise the revenues that can be reinvested in the pursuit of these Public Purposes.

11) There is, however, a danger that, in maintaining an ongoing commercial

subsidiary, the BBC will focus on maintaining and strengthening that subsidiary, rather than on the best way to maximise added value for the BBC.

The extent to which the BBC's commercial activities meet the criteria required of them

1) As we have noted in section 1, commercial activities should exist to maximise the "added value" of BBC assets such as programmes, and return the resulting income to the BBC so that it can be re-invested in public service activities. [36]

2) In addition, the BBC's Fair Trading Guidelines stipulate that any BBC commercial activity must adhere to four Commercial Criteria, which are:

· "Fit with the BBC's Public Purposes;

· Not jeopardise the good reputation of the BBC or the value of the BBC Brand

· Exhibit commercial efficiency; and

· Comply with the Trust's Fair Trading Policy, the BBC's Fair Trading Guidelines and, in particular, avoid distorting the market."[37]

3) We note that the requirement under the Fair Trading Guidelines is for each activity to conform to all four of these Commercial Criteria.

4) Pact has concerns that BBC Worldwide is failing to meet the above requirements in three key areas:

a. BBC Worldwide's "preferred partner status": BBC Worldwide has a "first-look" arrangement with the BBC under which it can exclusively bid for the right to act as the distributor for all BBC programming made in-house. The BBC Fair Trading Guidelines require that programmes sold to BBC Worldwide by the BBC are at market rates, yet they allow the BBC to gauge this market rate through occasional benchmarking. This means that the BBC has no effective way of gauging the market rate for prices to its programming, and therefore cannot guarantee that it is maximising the value of BBC assets, which should be its overriding goal.

b. Scope: BBC Worldwide's overseas investments in some cases do not fit with a Public Purpose, thereby breaching the first point in the BBC's Commercial Criteria. Moreover, they represent in Pact's view an unnecessary financial and reputational risk, therefore potentially breaching points two and three of the Commercial Criteria (reputation and commercial efficiency).

c. Transparency: BBC Worldwide manages 29 different television channels around the world, but only publishes a public financial breakdown of these businesses by three geographic areas: Europe, Middle East and Africa; America; and Rest of the World. This means it is impossible to see whether these channels are paying BBC Worldwide market rates for the rights to BBC programmes, and therefore represents a failure to demonstrate commercial efficiency. Additionally, the criteria for reviewing the efficiency of commercial investments are in our view too broad, and the minimum threshold of Ł50m for investments that must be referred to the Trust's Finance and Strategy Committee is too high. We also see a need for greater transparency in terms of BBC Worldwide's investments in BBC in-house compared to external programmes at production stage. This is important in order to ensure that in-house and external suppliers are operating on a level playing field.

5) The following sections deal with each area in more detail.

BBC Worldwide's "preferred partner status"

6) BBC Worldwide is the BBC's "preferred partner" for exploiting its content. This means that BBC Worldwide has first refusal on acquiring the commercial rights to any in-house programme for subsequent exploitation, such as the rights to sell Doctor Who or Top Gear overseas (to be clear, this is in addition to the rights that BBC Worldwide may acquire to programmes that are commissioned by the BBC from external suppliers in the independent production sector. These are subject to a greater level of competition from commercial sector distributors as the rights are owned and sold by the external producer).

7) We understand the process by which BBC Worldwide acquires rights to programmes made by BBC in-house production is as follows. The BBC's programmes are commercially exploited through its Commercial Agency. This is done by selling the rights to commercially exploit that IP to third parties. BBC Worldwide will be asked by the Commercial Agency to make a bid for such properties on an exclusive basis - i.e. before any other party has the opportunity to make a rival offer for those rights. If the Commercial Agency is not satisfied with BBC Worldwide's offer it is common for BBC Worldwide to have a further exclusive period - an exclusive "second look" - in which it may raise its bid. Again, no other third party company will be able to compete to represent BBC programmes at this stage.

8) Finally, if BBC Worldwide chooses not to make a further higher bid after its second exclusive period, or the Commercial Agency is still not satisfied with the offer, a programme may be put out to tender on the open market. This rarely happens. BBC Worldwide chief executive John Smith told the review conducted by Lord Burns in 2004 that, under this arrangement, "roughly 20% of all the rights that come off the machine every year are acquired by the private sector."[38] We believe this even this 20% figure may include programmes made by external producers as well as BBC in-house, and that closer to 10% of in-house programmes is offered to market. We are writing to BBC Worldwide for clarification.

9) The preferred supplier status of BBC Worldwide calls into question whether the BBC is maximising the value of its assets, as without exposing those assets to genuine competition in the marketplace it is impossible to accurately gauge their real worth. The Fair Trading Guidelines require that the BBC charge fair prices for these programmes, stating that fair prices: "should broadly be in line with the overall market context where there is an external market for comparable goods or services and where public data is available."[39] They add that, to establish the market rate, the BBC may use "benchmarking exercises or market testing."[40]

10) This in Pact's view is an unsatisfactory way to gauge the value of IP, which is not a homogenous product. Occasional benchmarking cannot capture the complexities of a rapidly evolving market, or take into account deals that are confidential.

11) Furthermore, if competitors in the commercial sector were genuinely able to compete on a level playing field for rights to BBC in-house programmes, it is highly likely that certain properties would be subject to bidding wars between different companies, thereby greatly increasing the potential returns to the BBC and, by extension, the licence fee payer. When programmes commissioned by the BBC from external suppliers have been auctioned in the open market, private sector companies have in cases outbid BBC Worldwide.[41] Additionally, companies in the private sector would be encouraged to develop ways to exploit BBC content that BBC Worldwide might not consider or be well placed to develop. Enabling a wide range of companies to compete for BBC rights will present the BBC with new ways of exploiting its content.

12) Crucially, without exposing in-house programme assets to real competition, the BBC cannot guarantee it is maximising their added value. The assets in question are substantial. The BBC is the biggest investor in new UK television programming, and invests twice as much in in-house programming (Ł800m pa) as it does not external commissions (Ł400m), as shown below.

Figure 3: Investment in new UK programming by broadcaster

Source: Ofcom, Communications Market Report 2008, page 184 (adjusted data)

13) BBC in-house programming therefore represents around 30% of all new UK programming made by all broadcasters. Much of this programming will have a strong market presence, as it will have aired on the BBC1 or BBC2, which have a high audience share, and will be highly attractive to distributors in the commercial sector.

14) BBC Worldwide has previously objected to opening up in-house programming to an auction process on the grounds of efficiency.[42] We do not accept this. Auctioning rights is common practice across the industry, and could involve as little as notifying potential bidders with an email. Our proposed system is already practiced by other parts of the BBC, including the Commercial Agency itself. Bidding might be conducted where appropriate on groups of shows rather than individual programmes. However, even under an open auction for individual programmes, it is reasonable to expect increased revenues resulting from the ensuing competition would more than cover any (moderate) overhead costs incurred by the BBC's Commercial Agency. We will detail our arguments on this in the section on the future of the BBC's commercial activities.

15) The BBC has also suggested that only its own commercial subsidiaries can be trusted to safeguard the BBC's reputation. This does not bear scrutiny in the market place, where private companies regularly licence the use of properties around the world to third parties with no discernable damage to the quality of the show or their reputation. It is common practice for clauses to be included in any licence agreement to safeguard this. As we detail later in this section under Scope, BBC Worldwide's claim to be the guardian of the BBC brand is questionable.

16) BBC Worldwide has also argued that it must have high profile BBC shows in order to maximise the commercial value of its less commercially attractive properties, or offset losses on non-commercial properties with profits from hit shows. This argument does not take into account the likelihood of certain properties commanding a higher price if they were exposed to competition amongst buyers, and the overall return to the BBC being greater as a result. We also note that BBC Worldwide's ability to use hit shows to leverage the sale of other shows is already subject to competition rules, and making the supply of one product conditional on the customer accepting another product could amount to abuse of a dominant market position. We will outline these arguments in more detail in the section on the future of the BBC's commercial activities.

Scope

17) Under the Fair Trading Guidelines, BBC Worldwide's activities are required to "fit with" the BBC's Public Purposes.[43] As we have outlined, this is important on a number of grounds, including minimising the risk to public funds and of an undue and negative market impact, as well as ensuring the BBC maintains a focus on its core Public Purposes. The BBC Trust elaborates on this in its Fair Trading Policy, stating that a commercial activity must connect with the Public Purposes other than in purely financial terms:

"The Agreement specifies that a Commercial Activity is to be considered to fit with the BBC's Public Purpose activities if it is appropriate to be carried on in association with the promotion of the Public Purposes; and it is connected, otherwise than merely in financial terms, with the ways in which the BBC promotes its Public Purposes."[44]

18) With this in mind, we question the grounds for some of BBC's Worldwide's investments overseas. BBC Worldwide has adopted an aggressive expansion strategy in recent years, investing in anything from Australian travel book publisher Lonely Planet, to the Indian version of Hello! magazine, through to a string of production companies dotted around the world.

19) We cannot see how BBC Worldwide's consumer magazine joint venture in India fits with its Public Purposes. Called Worldwide Media, the joint venture includes the Indian versions of Hello! and Grazia magazines. Arguably, the BBC's ownership of such celebrity-focused magazines actually conflicts with the second Commercial Criteria of not jeopardising the reputation of the BBC.

20) BBC Worldwide has previously said that its joint venture with the Times of India is marginal to its other activities, and the Charter Agreement makes allowances for commercial activities that do not fit with the BBC's public purposes if they are peripheral to other activities that do meet those requirements. However, the sole purpose of this joint venture is publishing consumer magazines in India, while the reported cost of BBC Worldwide's ownership of Lonely Planet is Ł90m - which would represent around 10% of BBC Worldwide's total annual sales of Ł916m for the year to March 2008.

21) For the same reason, we are also concerned by BBC Worldwide taking ownership stakes in production companies overseas. BBC Worldwide has done this, we understand, in order to control the remaking of BBC programmes for local markets in overseas countries (known as "formatting"), and to have privileged access to the output of that company so that it can exploit the rights internationally.

22) Pact has no objection in principle to BBC Worldwide investing where appropriate in a UK-based production company, providing this is subject to a clear and rigorous accountability process. This can help the BBC fulfil its Public Purpose of stimulating creativity, which calls for the licence fee to be used to support UK creative talent and the UK's creative industries. But we cannot see how investments in overseas production ventures fit with this Public Purpose, which is clearly aimed at supporting and stimulating UK creativity, not the creative industries in other countries. The Government's White Paper on the Charter required the BBC to: "use its unique position to inspire, support and showcase the best of the UK's creative talent."[45] Its rationale was that:

"The creative industries are already important to the UK economy, and the government wants them to make an even greater contribution in the future. Between 1997 and 2003 the creative sectors grew twice as fast as the overall economy. They employ around 1.8 million people and account for a twelfth of our economy, more than in any other country. The UK's current strength in creative industries is a real opportunity. We need to build on this strength and capitalise on growing markets."[46]

23) Another of the BBC's six Public Purposes is "bringing the UK to the world and the world to the UK."[47] Although this clearly has an import/export element, it should not give BBC Worldwide carte blanche to engage in any activity of its choosing. In describing this Public Purpose, the Charter Agreement stresses the goal of making UK people aware of international issues and culture, and bringing high quality international news coverage to international audiences.[48] In our view, investing in an overseas company does not deliver on this Public Purpose. Programmes made by these companies may never appear on UK television, and therefore do not contribute to raising UK people's awareness of international issues. Nor are the companies concerned known for their news programming.

24) The White Paper on Charter renewal explicitly refers to the role of BBC commercial activities in regards to this Public Purpose as: "Better promotion of UK culture, talent and intellectual property overseas; added value returned to licence fee payers."[49]

25) We cannot see how investing in overseas companies promotes UK culture, and view the potential for added value to be derived as a result as highly questionable. Selling the rights to remake BBC programmes to these companies would constitute creating added value from BBC assets. Investing in the company is an entirely different proposition, as we will outline.

26) BBC Worldwide may argue that it stands to recoup a higher level of return on its format (remake) rights by owning a producer in an overseas market, as it will also receive production fees from remaking its show. Yet by investing in one company, the BBC creates the incentive of automatically channelling all remakes of BBC programmes through that entity, rather than auctioning the rights on the open market (in some cases, is part of the contract that the company in question will have exclusive "first look" at remake rights to BBC properties). Having an automatic partner in a local market means that the BBC is missing out on the opportunity to benefit from competition between broadcasters and producers in that market for the remake rights to BBC shows. Distributors with a high-profile property for remaking in an overseas territory often create an auction between various parties, with the price for the property rising as a result.

27) Moreover, there is a considerable financial cost in taking share of ownership in a production company. We would argue that taking an ownership stake in a company in fact exposes the BBC to a greater financial and reputational risk than simply licensing a format. The UK independent production sector has stabilised following the introduction of the Codes of Practice/Terms of Trade in the 2003 Communications Act, but independent television production around the world is notoriously volatile and, given general economic conditions, private sector investment in media stocks has cooled significantly over the last 12 months on a worldwide basis. We assume that funding for BBC Worldwide's equity stakes in overseas production companies is raised through debt financing, in which case BBC Worldwide should be made to disclose in detail the terms of that arrangement in order to provide assurances that it is operating in a manner comparable to the market. In the case that BBC Worldwide used equity from profits on its other activities, this represents a direct reduction in the returns that BBC Worldwide has generated for the core public service activities of the BBC. In either case, BBC Worldwide is assumed to be exposed to the significant risk of its investments making a loss, again resulting in a reduction of the profits it can return to the BBC for reinvesting in public service activities.

28) The BBC has previously suggested that it requires an ownership stake in overseas production companies in order to control the production, through that company, of local versions of BBC shows, and thereby protect the BBC brand. This ignores the fact that private companies regularly licence the remaking of properties such as Who Do You Think You Are? and Who Wants To Be A Millionaire? around the world, with no discernable damage to the quality of the show or the reputation of the original broadcaster. So has the BBC previously - in fact it still licences formats to many of its hit shows, such as The Weakest Link and Strictly Come Dancing, to third parties in dozens of countries, with no negative impact on its reputation.

29) By taking equity in a company, the BBC actually increases the risk to its reputation. By aligning itself with one producer in a market, the BBC is not just missing the opportunity to spark a bidding war; it is also failing to sell the remake rights to the most suitably qualified producer for that particular show - the skill set for remaking a quiz show is radically different to that required for a drama, for example. This could in turn have a reputational impact if the BBC's automatic partner does a poor job on a show in a genre in which it has little or no experience. This is quite possible; it is extremely unusual in the production sector for companies to stray outside their specialist genres. Pact's annual census of the UK independent production sector shows that companies work on average in two genres.[50]

30) Additionally, as a co-owner of a company, the BBC does not just have to manage production on one show, but to an extent becomes responsible for and, most importantly, associated with that company's entire output. In Australia, for example, BBC Worldwide has taken 25% equity in The Freehand Group, which is producing a local version of the BBC show, Top Gear. One of Freehand's most well-known programmes is Joker Poker, an entertainment show based around gambling and sponsored by a whiskey company, Wild Turkey Bourbon, and casino groups. According to the Sydney Morning Herald, Wild Turkey invested up to A$1m to fund one version of the show.[51]

31) The BBC is therefore linked to a well-known show that involves, promotes and/or is associated with gambling and alcohol. On the company website for Freehand, the BBC logo is clearly visible as a stakeholder (as BBC Worldwide), next to a publicity still for Joker Poker prominently featuring a poker table with the logo of Crown Casino on it.[52]

32) Joker Poker is an example of "branded content" - i.e. where an advertiser sponsors or invests in a programme in return for publicity within the show and/or its publicity materials. We understand that in the UK Joker Poker would be classified as product placement and that the BBC would therefore be prohibited from making it in the UK. The BBC's Editorial Guidelines state: "We must never include a product or service in sound or vision in return for cash, services or any consideration in kind. This is product placement. It is illegal to make any such arrangements in the EU."[53]

33) We note that the BBC Trust's guidance on fulfilling this Commercial Criterion explicitly requires commercial services to adhere to Editorial Guidelines, stating: "The assessment of the proposals should comply with the editorial controls set out in the BBC's Editorial Guidelines."[54]

Transparency

34) BBC Worldwide's Channels Division manages a portfolio of 29 channels around the world, including BBC America and a 50% share of UKTV. Our concern is that the amount paid by each channel for rights to a programme is not made public. BBC Worldwide's annual report merely groups its channels by US; Europe/Middle East/Africa; and Rest of the World. In the case of BBC in-house programmes, BBC Worldwide's channels may be underpaying for programmes as BBC Worldwide does not have to compete with distributors in the commercial sector for the rights, and may pass on programmes to its channels at a subsidized rate.

35) We have similar concerns regarding the transparency of BBC Worldwide's investments in BBC programmes at production stage. It is common for BBC Worldwide to invest during the production process in both in-house and external programmes commissioned by the BBC as part of the financing package for a show - it spent Ł85.1m on such activity in 2008.[55] In exchange for its investment, BBC Worldwide will take rights to the show for sale at a later point.

36) The BBC will use the investment from BBC Worldwide to sit alongside its core programme budget and fund the creation of a programme. We have no objection to the principle of BBC Worldwide investing in BBC shows at financing stage - indeed, BBC Worldwide revenues should be reinvested in the BBC's core activity of making UK public service programmes. However, the BBC does not make clear the split between BBC Worldwide's investments in in-house and external programmes. Nor does it make public the proportion of the budget BBC Worldwide pays in either case. Were in-house producers securing a greater level of investment from BBC Worldwide than external producers who have been commissioned the BBC, this could give them an unfair advantage when competing with external suppliers for BBC commissions.

37) This would potentially undermine the BBC's stated aim of commissioning the best ideas, no matter where they come from, so that the licence fee payer benefits from the most diverse, engaging and innovative mix of shows. BBC director general Mark Thompson told the House of Lords Select Committee during the Charter review that: "It is in the interests of the licence payer that the licence fee investment should go to the best ideas and the best talent."[56]

38) Finally, the criteria used for reviewing BBC Worldwide's investment's, for example in overseas production companies or in Lonely Planet, are extremely broad as set out in the Trust's Commercial Protocols (C1 and C2) - and arguably require less detail than a publicly-listed company would have to provide its shareholders. These Protocols also include setting the minimum investment level for referral to the Trust's Finance and Strategy Committee at Ł50m, an extremely high threshold in comparison to the commercial sector.[57] This threshold would probably be high enough to mean that BBC Worldwide's investments in production companies overseas were not referred to the Finance and Strategy Committee.

The appropriateness and effectiveness of the governance framework for the BBC's commercial activities

1) We have outlined in the preceding section our concerns that BBC Worldwide is acting in an inappropriate manner in a range of areas - i.e. its preferred partner status, scope of investments and transparency. In our view, the regulatory and governance framework is logically failing as these activities have been allowed to happen.

Separation

2) The BBC Fair Trading Guidelines require clear separation between the BBC's public service and commercial activities. They require commercial services to operate "at arm's length" from public service activities, and to maintain "a clear and separate management structure."[58]

3) However, the relationship between BBC Worldwide and the BBC has become blurred, with BBC executives sitting on the BBC Worldwide board and vice versa. John Smith, chief executive officer of BBC Worldwide and a member of the BBC Worldwide Board, sits on the BBC Executive Board, while Jana Bennett, Director BBC Vision and a member of the BBC Executive Board, sits on the BBC Worldwide board. Zarin Patel, BBC Group Finance Director, also sits on both boards. We cannot see how the BBC can ensure an appropriate level of separation between its two activities under these circumstances.

Framing of regulations

4) Along with the issue of separation, in our view the regulations governing BBC Worldwide contained in the Fair Trading Guidelines are also inadequate. In the case of separation issues outlined above, the Guidelines are in our view simply being breached. In other cases, they outline the appropriate high-level requirements, e.g. the broad headlines of the Commercial Criteria, but fail to create an adequate framework to ensure that these requirements are being adhered to. In some instances, the Guidelines are framed too loosely and are therefore potentially open to abuse. In other areas, they contain a reasonable level of detail, but still fail to address the real issue, and so fail to achieve their own goals.

5) As an example of where the framing is too broad, one of the four Commercial Criteria in the Fair Trading Guidelines - to which all commercial activities must adhere - is to "fit with" the BBC's Public Purposes.[59] The Trust states that this means that an activity "must link clearly with the way in which the BBC promotes its Public Purposes."[60] Although it is clear that a commercial activity does not have to be directly tied to a specific channel, what it means to "clearly link with" a Public Purpose may be open to interpretation and offers no more clarity than "fit with." In our view, investing in publishing consumer magazines in India, Lonely Planet and overseas production companies are either breaches of this Commercial Criterion or, at best, evidence that it is framed so loosely as to fail to prevent inappropriate activity.

6) In other cases, the Guidelines are detailed but fail to achieve their stated aims, as the guidance they offer is inappropriate. The BBC Trust's Protocol requires BBC commercial services to maximise added value for the benefit of the licence fee payer, and the Fair Trading Guidelines stipulate that any services, including programmes, that the BBC supplies to its commercial subsidiaries must be at prices that are in line with market rates. But the Guidelines then allow the BBC to establish the prices of its assets by occasional benchmarking, which is inadequate as a way of ensuring that prices are in line with the market. As a result, the BBC cannot guarantee it is charging market rates or maximising the value of its assets.

7) Additionally, the Fair Trading Guidelines focus on ensuring a (right and proper) separation between BBC public service and commercial subsidiaries such as BBC Worldwide; however, they do not require sufficient transparency of accounting between individual commercial services operated within a commercial subsidiary, such as BBC Worldwide's extensive portfolio of channels in overseas markets. Nor do they call for an appropriate level of detail in BBC Worldwide's financial reporting on its investments.

The future of BBC Worldwide and other BBC commercial subsidiaries

1) We have stressed that we see the commercial exploitation of the BBC's assets as hugely important to the future of public service broadcasting, and this should in our view continue, within appropriate limits. However, for Pact, the key issue is the nature of future commercial exploitation, and more precisely the nature of the appropriate vehicle for that exploitation. It should be not assumed that BBC Worldwide is automatically the best partner for the BBC, which should consider harnessing the wider commercial sector to a far greater degree.

BBC Worldwide's "preferred partner status"

2) We have argued that BBC Worldwide's preferred partner status means that the BBC has no guarantee that it is maximising the added value of its programme assets. We consider that an open auction system that required all rights to BBC in-house programmes to be put to tender so that third parties in the private sector could compete to distribute them, alongside BBC Worldwide, would address this. Such a system would:

· Maximise competition, allowing the BBC to achieve the best possible added value on its assets for the licence fee payer.

· Encourage innovation by allowing a wider range of distributors to develop ways to exploit BBC shows, again increasing potential returns to the BBC.

· Enable the BBC to guarantee and demonstrate that it is achieving the best possible prices for its rights.

· Help the BBC to fulfil its Public Purpose of stimulating creativity by allowing private companies access to a substantial source of content, at the same time as maximising returns to the BBC.

3) BBC Worldwide has acknowledged that such as system would be very fair, but has historically objected on the grounds of efficiency. Chief executive John Smith told Lord Burns' review in 2004 that auctioning rights on an individual spot basis so that all companies, including BBC Worldwide, could compete for them: "would be very fair but highly inefficient."[61]

Efficiency

4) We do not accept that opening up the auction process for BBC in-house programmes so that commercial sector companies can compete on a fair basis need be inefficient to the BBC. Auctioning rights to the market is standard industry practice, and is conducted by hundreds of private sector distributors around the world. Our proposed system is already practiced by other parts of the BBC, and has in the past been used by the Commercial Agency itself. When seeking suppliers to make a BBC show such as Question Time, the BBC conducts a public tendering process involving the private sector on a regular basis. There is also clear precedent for an open auction model within the BBC's Commercial Agency, which until relatively recently would conduct auctions involving the private sector for book publishing rights.

5) Bidding might be conducted where appropriate on groups of shows - e.g. all BBC drama over a season - subject to competition rules. Under an open auction for individual programmes, it is reasonable to expect increased revenues resulting from the ensuing competition would more than cover any overhead costs incurred by the BBC's Commercial Agency.

6) From BBC Worldwide's point of view, an open auction process would not necessarily require any substantial changes to current practice - providing its current practice is robust. Currently, when BBC Worldwide formulates a bid for a property from the Commercial Agency, it is necessary for it to evaluate the potential revenues that can be derived from the market place for each of the various rights to a programme in order to reach an overall offer. BBC Worldwide's chief financial officer, David King, stated in 2004:

"The way the process works is that the Commercial Agency bring programmes to [BBC Worldwide] and offer rights...The basic principle of the process is [BBC Worldwide] then assesses the programme across the television, video, audio, book and other medias to determine what value it thinks it can derive from the market-place from selling those programmes, those books, etc."

7) There should be little if any change to this process for BBC Worldwide even if private sector companies are also formulating bids for a property, and we cannot see how an open tendering process for BBC in-house programmes would automatically increase costs

Reputational risk

8) An argument put forward by the BBC is that only the BBC and its commercial subsidiaries can be trusted with the BBC brand. As we have mentioned, this does not bear scrutiny in the market place, where private companies regularly licence the use of properties around the world to third parties with no discernable damage to the quality of the show or the reputation of the original commissioning broadcaster. Additionally, BBC Worldwide's association with a production company involved in branded content involving alcohol and gambling concerns shows that it is no guarantor of the BBC's reputation for public service.

Scale

9) BBC Worldwide has also suggested that its scale makes it the best-placed organisation to exploit BBC content, and that without access to hit shows it cannot effectively market less commercially attractive properties, or use revenues from hit shows to offset investments in other properties.

10) In considering this argument, it is important to bear in mind that BBC Worldwide's ability to demand a buyer purchase a less attractive programme in order to buy a hit show is constrained under competition rules. BBC Worldwide should not insist that a buyer must acquire one show if it wishes to buy another - i.e. force a buyer to buy a low profile programme in order to buy a hit show. This could represent "tying", i.e. making the supply of one product conditional on the customer accepting another product, and could amount to abuse of a dominant market position.

11) In terms of BBC Worldwide's ability to cross-subsidize less commercial properties with more valuable ones, this argument fails to take into account the potential for the BBC to recoup profits on its hit programmes from a third-party distributor in the commercial sector, and reinvest them itself in appropriate areas of programming. The BBC's Commercial Agency already has to administer revenues generated by private sector distributors on the limited amount of in-house programming that it does put out to the market.

12) Most importantly, however, the BBC's argument does not take into account the fact that, under the current system, it cannot guarantee that it is achieving the market rate for its assets, or that its assets might command a higher price if they were exposed to competition amongst buyers, with the overall return to the BBC being greater as a result.

Scope

13) We have also outlined concerns regarding BBC Worldwide exceeding the BBC's core public service remit and making investments that are unrelated to its programme assets or its Public Purposes. In our view, this amounts to a breach of the Fair Trading Guidelines' stipulation that all commercial activities "fit with" the BBC's Public Purposes.[62]

14) In the specific case of investments in overseas production companies, it is not necessary or appropriate for the BBC to take ownership of a company in order for it to derive added value from BBC programme assets. The BBC should divest itself of such interests. Going forward, it would be far safer financially and reputationally for the BBC to simply licence the right to make a local version of shows to another company after conducting an open auction. This is common industry practice. The BBC would be able to insist on approval over any editorial issue, or any matter that might compromise the BBC reputation, without making a long-term investment.

15) More generally, we call for the BBC to reduce its investments in overseas ventures. BBC commercial activities should focus on generating added value for existing programme assets, not long-term overseas investments.

Transparency

16) We have expressed concerns over a lack of transparency within BBC Worldwide, particularly in relation to its portfolio of overseas channels, and in terms of the broadness of the investment criteria for BBC commercial activities. The Fair Trading Guidelines focus on ensuring a separation between BBC public service and commercial activities; they do not in our view explicitly require sufficient transparency of accounting between individual commercial services operated by a commercial subsidiary such as BBC Worldwide, which may have a bearing on prices BBC Worldwide pays to the BBC. Nor do the Guidelines require sufficient detail in terms of comparing investments that BBC Worldwide makes at production stage in in-house and external BBC commissions. We therefore ask the Committee to recommend that the Trust review and, if appropriate, tighten the transparency and reporting requirements for BBC Worldwide.

How the money returned to the BBC by its commercial operations is invested

1) Public service programming faces well-documented funding issues. Increasing pressures on broadcasters' advertising revenues (due to the growing number of channels across which advertising budgets are spread) are already impacting on UK programme budgets, with less commercial public service genres such as news and children's the first to be cut.

2) Ofcom's ongoing second review of Public Service Broadcasting predicts a funding gap of up to Ł235m per annum by 2012 just to maintain current levels of UK-made, public service programming on the four main public service broadcasters (BBC, ITV1, Channel 4 and Five).[63] The table below illustrates Ofcom's forecasts for the decline in spend on new UK programming, based on four different models.

Figure 4: Spend on new UK programming

Source: Ofcom PSB Review Phase 1: The Digital Opportunity, page 67 (adjusted data)

3) Ofcom does not envisage the digital, cable and satellite channels plugging the gap: their spending is predicted to remain at 10% of overall investment in new UK programming, just as it has done over the last decade.

4) The pressure on Public Service Broadcasting is therefore very much a pressure on investment in the making of (UK) public service programmes. As we have outlined in this submission, we see UK-made programming, as opposed to imports, as at the heart of public service broadcasting, essential to delivering the goals of public intervention in this area - such as informing ourselves about our society; representing diverse viewpoints within the UK, including the devolved nations and the English regions; and to interpreting international issues by using appropriate reference points. UK-produced programming is therefore fundamental to fulfilling the Public Purposes of the BBC under its Charter, and the four public service broadcasting purposes outlined by Ofcom.[64]

5) Commercial exploitation of BBC assets can help offset these declines by reinvesting profits into the areas of public service programming and online content most under threat, i.e. core public service genres and areas such as programming from the devolved nations and English regions outside London and children's. These programmes are crucial to the BBC's delivery of its Public Purposes, as defined by its Charter. And in focusing on programming, this investment ensures that licence fee payers can see the benefits on screen.

6) It is currently unclear where profits from commercial activities are re-invested as the BBC does not disclose this information. BBC Worldwide declares how much it invests at production stage in BBC programming as part of the financing package in its annual report (although not, as we have noted, the breakdown between in-house and external BBC commissions). However, the BBC does not reveal where profits (e.g. royalties from programme sales) are re-invested. In our view, these too should be reinvested into programming.

7) We propose therefore that the BBC be required to declare where profits from commercial exploitation are being re-invested in order to help ensure that the licence fee payer is benefiting from this added value.

October 2008

[1] All Public Service Broadcasters (the BBC, ITV1, Channel 4 and Five) have quotas for "original" programmes, which the Broadcasting (Original Productions) Order 2004 defines as programmes which have their first appearance on television in the UK. In practice, this means programmes that are made in the UK.

[2] Second Public Service Broadcasting Review, Phase 2: preparing for the Digital Future, Ofcom, September 2008, page 5.

[3] Charter Article 3.

[4] Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications.

[5] BBC Trust, Protocol B6 Commercial Strategy.

[6] Under the Codes of Practice/Terms of Trade introduced in the 2003 Communications Act, and regulated by Ofcom, independent suppliers retain control of certain secondary rights to programmes that they create, including the overseas exploitation rights. The BBC, as primary commissioning broadcaster, will receive a share of any revenues generated from subsequent exploitation.

[7] BBC Fair Trading Guidelines, 3.4.

[8] BBC director general Mark Thompson told the House of Lords Select Committee during the Charter review: "It is in the interests of the licence payer that the licence fee investment should go to the best ideas and the best talent." Mark Thompson oral evidence to House of Lords Select Committee on the BBC Charter Review, First Report, Section 255.

[9] BBC Charter Article 23 and 24; Agreement Clause 66.

[10] BBC Fair Trading Guidelines, 2.3.

[11] http://www.freehandtv.com.au/index.php?option=com_content&task=view&id=12&Itemid=26.

[12] BBC Editorial Guidelines, Page 118.

[13] BBC Trust Protocol C1, page 8.

[14] The BBC Fair Trading Guidelines (Section 3.6) require clear separation between the BBC's public service and commercial activities. They require commercial services to operate "at arm's length" from public service activities, and to maintain "a clear and separate management structure."

[15] BBC Charter Agreement, section 65 (4).

[16] Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications.

[17] Independent Production Census 2007/08, Digital-i for Pact.

[18] Rights of Passage report 2007, TRP for Pact.

[19] Rights of Passage report 2007, TRP for Pact.

[20] Under section 4 of the Royal Charter, the BBC's Public Purposes are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications.

Ofcom's public service purposes are: informing our understanding of the world; stimulating knowledge and learning; reflecting UK cultural identity; and representing diversity and alternative viewpoints (see Second Public Service Broadcasting Review - Phase 2: Preparing for the Digital Future, page 13).

[21] Second Public Service Broadcasting Review -Phase 2: Preparing for the Digital Future, Ofcom, Page 31.

[22] PSB Review Phase 1: The Digital Opportunity, Ofcom, page 55.

[23] Charter Article 3.

[24] Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications.

[25] BBC Trust, Protocol B6 Commercial Strategy.

[26] BBC Fair Trading Commitment.

[27] A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.6.1.

[28] BBC Editorial Guidelines, Page 118.

[29] The BBC Fair Trading Guidelines, page 44, state that the BBC must comply with EU law on State Aid, stating that: "Broadly, the EC Treaty prohibits any aid granted through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain firms or the production of certain goods."

[30] BBC Fair Trading Guidelines, 2.30.

[31] Under section 4 of the Royal Charter, these are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications.

[32] BBC Charter Article 3.

[33] BBC Fair Trading Guidelines, Introduction, page 3.

[34] BBC Charter Agreement, clause 69.

[35] BBC Fair Trading Guidelines, 2.3.

[36] White Paper on BBC Charter: A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.6.1.

[37] BBC Fair Trading Guidelines, 2.3.

[38] John Smith, BBC Charter Review Seminar: Commercial Services, 22 September 2004.

[39] BBC Fair Trading Guidelines, 3.12.

[40] Ibid, 3.15.

[41] Under the Codes of Practice/Terms of Trade introduced in the 2003 Communications Act, independent suppliers retain control of certain secondary rights, including overseas rights, to programmes they make (although the BBC will receive a substantial share of any revenues from their exploitation as the commissioning broadcaster).

[42] Chief executive John Smith told Lord Burns' review in 2004 that auctioning rights on an individual spot basis so that all companies, including BBC Worldwide could compete for them: "would be very fair but highly inefficient." John Smith, BBC Charter Review Seminar: Commercial Services, 22 September 2004.

[43]The BBC's Fair Trading Guidelines, section 2.3. Also see Charter Agreement, Section 69. Our highlighting.

[44] Fair Trading Policy, BBC Trust, Section 27.

[45] A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.4.1

[46] Ibid, Section 3.4.4.

[47] BBC Charter Agreement, Section 10

[48] Ibid, Section 10 (b)

[49] A public service for all: the BBC in the digital age, DCMS March 2006, Section 3.6.1.

[50] Independent Production Census 2007/08, Pact, page 46.

[51] http://www.smh.com.au/news/business/advertisers-take-own-shows-into-prime-time/2006/07/26/1153816252624.html.

[52] http://www.freehandtv.com.au/index.php?option=com_content&task=view&id=12&Itemid=26.

[53] BBC Editorial Guidelines, Page 118.

[54] BBC Trust. Protocol D6 - The BBC's Commercial Services, page 11.

[55] BBC Worldwide Annual Review 2007/2008, page 38.

[56] Mark Thompson oral evidence to House of Lords Select Committee on the BBC Charter Review, First Report, Section 255.

[57] BBC Trust Protocol C1, page 8.

[58] BBC Fair Trading Guidelines, 3.6.

[59] BBC Fair Trading Guidelines, 2.3.

[60] Fair Trading Policy, BBC Trust, Section 28.

[61] John Smith, BBC Charter Review Seminar: Commercial Services, 22 September 2004.

[62]The BBC's Fair Trading Guidelines, section 2.3. Also see Charter Agreement, Section 69.

[63] Second Public Service Broadcasting Review, Phase 2: preparing for the Digital Future, Ofcom, September 2008, page 5.

[64] Under section 4 of the Royal Charter, the BBC's Public Purposes are: sustaining citizenship and civil society; promoting education and learning; stimulating creativity and cultural excellence; representing the UK, its nations, regions and communities; brining the UK to the world and the world to the UK; and helping to deliver the benefit of emerging communications.