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UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE To be published as HC 1166-i House of COMMONS MINUTES OF EVIDENCE TAKEN BEFORE CULTURE, MEDIA AND SPORT COMMITTEE
COMMERCIAL OPERATIONS OF THE BBC
MR TONY COHEN, MR JOHN McVAY and MR CHARLES WACE MR TONY ELLIOT, MS CAROLYN McCALL and MS LYN HUGHES MR ANDREW HARRISON, MS SLY BAILEY, MR PAUL VICKERS and MS SANTHA RASAIAH Evidence heard in Public Questions 1 - 89
USE OF THE TRANSCRIPT
Oral Evidence Taken before the Culture, Media and Sport Committee on Members present Mr John Whittingdale, in the Chair Janet Anderson Philip Davies Paul Farrelly Alan Keen Mr Adrian Sanders Helen Southworth ________________ Memoranda submitted by FreemantleMedia and Pact
Examination of Witnesses Witnesses: Mr Tony Cohen, Chief Executive Officer, FreemantleMedia; and Mr John McVay, Chief Executive and Mr Charles Wace, Chairman, Pact, gave evidence.
Chairman: Good morning everybody. This is the first session of the Committee's inquiry into the BBC's commercial operations. We have three sessions this morning beginning representatives of the independent production sector. I would like to welcome Tony Cohen, Chief Executive Officer of FreemantleMedia, Charles Wace, Chairman of Pact and John McVay, Chief Executive of Pact. I am going to ask Adrian Sanders to begin. Q1 Mr Sanders: Is the BBC Worldwide simply doing what is required of it, in that it is maximising commercial revenue by exploiting the BBC brand and also diversifying into other profitable areas? Why should we be worried about that? Mr McVay: First of all, I would like to thank the Committee for beginning this investigation. The last revue of BBC Worldwide was conducted several years ago before the creation of BBC Trust. I think it is very helpful that the Committee is conducting this review now, particularly when we come to a point where issues around the future of PSB and so on are going to come to the fore before the debate in Parliament next year. The issue primarily, to answer your question, is BBC Worldwide should be a highly successful and highly profitable arm of the BBC to maximise profits, to return them back to the BBC which should reward the licence fee payer. It is not a question about the BBC or Worldwide making profits; it is a question of how they make profits; how they are accountable for the profits they make; and the various investments and the nature of the investments they make. From our position, many of our independent producers enjoy the relationship with BBC Worldwide; we are very pro-Worldwide making profits and returns to the BBC. So the purpose of Worldwide is not the question. The question is: how does it achieve those profits; and, in terms of its scope, what should it invest in, and what should it not invest in, and the nature of those investments. Mr Wace: I think also how transparent is the process as well and, in that transparency, how often the licence payer is getting best value for money out of BBC Worldwide. If all the programmes were thrown out into the commercial market, whether the market would itself set a rate which might be more profitable for the BBC than the situation that currently exists. Mr Cohen: I would just like to introduce myself to the Committee. My name is Tony Cohen; I am the CEO of Fremantle. I would also like to thank the Committee very much for inviting me to talk to you today. FreemantleMedia is an international production company. We operate in 22 countries around the world, mostly in popular drama and popular entertainment. Our company here in the UK talkbackTHAMES produces many of the top shows in the UK, like The Apprentice for the BBC, like Grand Designs for Channel 4, the X Factor and Got Talent for ITV, just to give you a sense of who we are. We work extensively with the BBC. We sell programmes like The Apprentice to them; and we sell programmes to BBC Worldwide too. We cooperate with the BBC as well as compete with them as distributors and as programme makers. We are here today because we have some serious concerns about how BBC Worldwide is conducting its operations, particularly in the light of the very recent expansion into international production. There are four concerns that we have. The first is: we believe that BBC Worldwide is exceeding its remit; secondly, we do not believe that it is unarguably commercially efficient; thirdly, we think it does run the risk of jeopardising the BBC's reputation; and, lastly, and for us most importantly, we think it distorts the market and it does not observe its own fair trading guidelines. Those are the four big issues as far as we are concerned. Q2 Mr Sanders: Could you give the Committee a specific example? Mr Cohen: May I just talk about the four concerns a
little bit if that would help to give you some specifics. In terms of exceeding the remit, BBC
Worldwide has to support the BBC's purposes.
It has to fit with them in ways, other than merely financial, laid down
as to what it must do. We do not really
understand how that fits with the BBC setting up production companies in Q3 Mr Sanders: Would you want to see BBC Worldwide completely separate from the rest of the BBC, in order that you could then have that competition for a BBC programme that is then available to go worldwide? Is that part of the answer? Mr Cohen: Yes, BBC Worldwide has a very, very privileged position. It has this enormous amount of money that is spent on fantastic programmes from the BBC, and it has this extraordinary exclusivity to get those programmes. It seems to me a much fairer way to separate it completely so that it has to compete in the market like we do for the right to export and to develop the commercial potential of the work that the BBC does, for a return obviously to the BBC licence fee payer, but also because it is a real commercial opportunity too. It is only be competition that real value can be achieved. Q4 Mr Sanders: What evidence could you give us to show that if that were the set-up the licence fee payer would benefit more than the licence fee payer benefits at the moment? Mr Cohen: The only way I could give you evidence is by saying, "Let's try it and see what happens". I can only tell you from our experience. Heaven for us is when you have more than one potential buyer, because then you have competition in the market and the price will rise as people want these properties. The material that comes out of the BBC, I am sure you know, is very valuable, particularly when they come up with big hits like Strictly Come Dancing or The Weakest Link. These shows can be remade in many, many countries around the world. They are very valuable, and any bidding situation will almost always push the price up. I cannot give you evidence, I am afraid, but I would say, "Try it and let's see what happens". I would be quite confident. Mr McVay: There is a way to get some sense of how it
would operate, because independent producers are not required to give their
distribution rights to BBC Worldwide. As
a result of the Communications Act those rights do go out to the market and are
subject to bidding wars amongst distributors, including Worldwide. Indeed, I think Tony's company recently won
the rights for Merlin in such a
process. Worldwide did not get that, so
obviously the money returned because BBC shares in the sales of those
programmes; and the money returned to the BBC could be considerable. The question is not about whether it is
significantly more money. The question
is: is the BBC currently getting as much
as it should? The heart of your question
is actually where we have a major problem that we do not know. There is no way to find out whether BBC
Worldwide overpays for programmes from independent producers and underpays for
programmes from its own in-house production.
That is information which is not available to yourselves or indeed us,
in terms of trying to scrutinise how BBC Worldwide works. Your earlier point, which I think Tony
alluded to as well about reputational risk, is very critical. Worldwide currently has a 25% shareholding in
a company in Australia called Freehand which makes a programme called Joker Poker, which is a gambling show,
which they profit from. That is
something they would not be allowed to do in this country. Indeed, if you look at their website you will
see prominently displayed on the front page of the website "BBC Worldwide" next
to "Joker Poker". Again, something the BBC would not be allowed
to do in this country. I think the risks
are that if Freehand broke some of the rules in Q5 Chairman: We are going to go into some of these specific areas in greater detail. I do not know to cover everything in the answer to the first questions. At the beginning we do want to look at the question of governance and whether or not the BBC Trust is succeeding in maintaining an arm's length relationship. One of the things which came out of a previous session that we had with the BBC was: the question of acquisitions by BBC Worldwide was only referred up to the Trust if it exceeded £50 million. The BBC has told us that actually that is pretty comparable to most boards having to refer back to its shareholders. That may not be quite an exact parallel. Do you find it is surprising that that is the threshold at which the BBC Trust gets involved? Mr McVay: Tony can probably talk about what he has to do to refer back to his shareholders when he is making an investment. I think from Pact's perspective it is unclear how the governance actually works, because the Chief Executive of Worldwide sits on the management board, the executive board of the BBC, which is the main board that is meant to oversee the operation of BBC Worldwide. It seems a bit strange that that is the situation, and we would certainly encourage the BBC and BBC Trust to think about a more appropriate means of governance of the commercial arms of the BBC. The £50 million is nearly half of the profits that Worldwide returns to the BBC. If it is 50% of your available profit we would tend to think that is quite a lot of money you are putting at risk in any one single investment. We do feel the Trust should have far more oversight about the operations of the commercial arm, because it impacts on the money returned to the BBC; so therefore it impacts hopefully on the programme budgets that the BBC spend to reward the licence fee payer who invested originally in those programmes in the first place. The other question is: we are not clear how the BBC manages those risks. Do they manage those risks consistent with good commercial practice? We do not know. Or do they just say, "We've got a whole lot of money there; let's find a way to spend it". Much like maybe a stationery budget in a local authority: "It's just there; let's spend it". That to us does not seem to be a very appropriate way to risk that public asset. Mr Wace: What happens to profit overall? Does the profit go back into programming, or does it go into general infrastructure? There seems to be a lack of transparency, not only about the governance but also about where the money actually goes back into the BBC. Mr Cohen: From a commercial operator's point of view £50 million seems incredibly high to be the level at which investments are judged. I cannot give you specific examples from our company because they are commercially confidential, but it would be a major order of magnitude less than £50 million being the threshold on which you would have to take serious investments to be assessed by our supervisory board and the supervisory boards above Freemantle. That would be quite consistent with normal commercial practice. As John says, £50 million is half the annual profits of BBC Worldwide - that cannot be right; it must be lower. There can only be one other body in the BBC that supervises BBC Worldwide's investments, and that would be the BBC's executive board. As we have already argued, it is hard to see how they can take a completely dispassionate view. It is not clear what their powers are and what levels they have to approve. All we know is the Trust's £50 million threshold. Q6 Alan Keen: We all own a little bit of the BBC so my interest is with my constituents who pay the licence fee and I want the best from it. You obviously have more to gain really from the BBC being restricted. Could you expand a little more on why we should restrict it further than we are now on Worldwide, and how you would like to see it actually managed? Mr McVay: We are not trying to restrict the BBC. What we are trying to do is make clear that the commercial arm and commercial functions of BBC Worldwide maximises profits back to the BBC to invest back into programming. As Charles as already said, it is unclear where that money does go. It may go to the overspend on Broadcasting House; it may go into bonuses; it could go a whole range of places. I think it is critical, with the licence fee payers in your constituency, if there is a profit made from their investment in the licence fee that they get that back on screen and on services that they feel add value to that licence fee. What we are seeking is clarity on: how Worldwide operates; what is its scope to minimise risk; and to ensure that when it makes investments that those investments have a return that then goes back to the BBC to reward the licence fee payers. That is our fundamental concern. Q7 Alan Keen: What incentive has BBC Worldwide to sell stuff cheap and be inefficient? Are you just saying they are inefficient; they would like to be efficient but they are incapable of it? Mr McVay: I think they are scarily efficient actually. I think that is one of the things, that Worldwide is very commercially efficient. What we are concerned about is with some of the investments it takes we are not clear whether we get a return on those investments; when they get a return and if they get a return; which we think is gambling with licence fee payers' profits effectively. It may be that they do get a return and it is a very large amount that they get, but there is no way to find out. Part of the problem is that you cannot actually interrogate this to say, "If Worldwide is making a profit of £118 million maybe it should be making £218 million". There is no way to find out if the return to the BBC is as much as it should be. It is a question that we do not really know and that is why we think this inquiry is very helpful, to try and establish some sense of: is it outperforming; is it underperforming? At a time when we are facing economic downturn across the rest of industry because of the advertising recession, clearly with the role of the BBC and the BBC's ability to maintain programme budgets for the licence fee payers to invest particularly in areas like drama, which is very expensive, it is very critical that Worldwide is overperforming, but we have to be clear what that is. The current return on profit - we are not sure whether that is a good one or a bad one. Q8 Alan Keen: Why do you think the BBC is selling programmes to BBC Worldwide at a cheaper rate than the market? Mr Cohen: Because BBC Worldwide has a guaranteed first look at this enormous output from the BBC. It is not put out to any kind of competitive position at all. If it was put out to a competitive position then I think, as I argued earlier, you would see prices rise. Your first question was: why should we try and restrict BBC Worldwide further? I think it is worth just pointing out that the reason why we are here today is that there were quite careful rules drawn up to circumscribe what BBC Worldwide could do. The reason for those rules is that they have such a fantastic privileged position getting all of this publicly paid for programming which, by the way, is probably £3/4 billion worth of programming every year being invested by the BBC. BBC Worldwide can take all of that, and because it has this privileged position it can damage its competitors, and it can damage markets. That is why all of the rules - about not jeopardising reputation; making sure it is commercially efficient; abiding by the fair trading guidelines - are there. The first part of the answer to your question is they ought to follow the rules clearly and unambiguously in order to prevent the consequences that were foreseen of damaging competitors in the market. To open up the product from the BBC to competition I think would give you a better return. I would argue that, because I see that every day in the commercial work that we do. I think the BBC has real issues about undermining markets, not just by this privileged position, but also by the fact that the BBC is funded by debt. It does not have any equity. As a commercial operator we have shareholders. When I put forward an investment proposition, like in a production company overseas, I have commercial returns to meet. It is absolutely not clear to us, what are the returns BBC Worldwide have to meet when it goes out bidding for companies? It is fuelled by debt - debt is cheaper than equity - that is all we know. If it has cheaper resources than we do to invest it can pay more than we can. You also asked: what could we do about that; what would be our prescription for BBC Worldwide? We would have three. The first is to open up to free-bidding the product that comes from the BBC; that would help a lot. Secondly, I do think they should sell down in the States in the production companies they have invested in; because, as John argued, we cannot see how that serves the BBC's public purposes. Thirdly, we think that the remit for Worldwide needs to be much clearer, so that we all understand: what are the principles that it has to follow; what are the rules where we are competing with them in the market? I hope that answers your question. Q9 Alan Keen: On the one hand you seem to be saying that it is inefficient and you are not getting a good enough return; and on the other hand you are saying it has got an advantage of unfair competition. Therefore, you must mean that they are selling the programmes too cheaply overseas; or they are producing them overseas too cheaply so you cannot compete with them; and if they did them in a more efficient way, a more cut-throat manner, licence fee payers could gain a lot from it; but you are not really sure whether they are or they are not because it is not transparent. That is really the point, is it not? Mr Wace: Until it goes out into the open market it will be very difficult to tell that. Until it is actually subject to commercial competition it will be very difficult to know that definitively one way or the other. Mr Cohen: BBC Worldwide when it is selling a programme
in the open market to a commercial broadcaster in Q10 Alan Keen: You are accusing them of using loss-leaders in the way they are trying to expand overseas by giving them programmes too cheap; but that may be a strategy that is quite acceptable to licence fee payers if it is going to benefit us in five years' time because they have put their tentacles out. You are saying, because we have no idea, that is wrong? Mr McVay: Yes. The BBC have launched 29 channels in different territories. We have no idea whether any of those channels, of themselves, are making a profit. They could all be loss-leading, we do not know. Q11 Chairman: We are assured that BBC Worldwide pays the market rates for the rights to distribute BBC product. They have told us that one of the ways they do this is by benchmarking on an occasional basis. Do you have any idea of what benchmarking consists of and whether or not it actually does result in the market rate being paid? Mr McVay: Benchmarking would appear to be a number of people in the commercial rights agency inside the BBC making their assessment of what the price may or may not be for a programme at any given time. Clearly that is not a market rate; that is a group of people coming up with a figure. The only way you ever establish market rates is by putting a product out to the market, then the market will bid for it and you will arrive at the best price you can get from the market. If it is the case where Worldwide overpays or pays large amounts of money for independent rights but is underpaying for in-house, then I do not see how they arrive at any market rate. Again, none of that is publicly available in terms of information. There are not even aggregated reports in the annual report about the average price they pay per hour for BBC in-house programmes. That is something we think would be very useful to establish: is the BBC getting the proper return from the money that has been invested by the licence fee payer? Q12 Chairman: You have brought up the position of Merlin which, because it was made by an independent production house, went out to market. BBC Worldwide bid for the right to distribute Merlin and Tony outbid BBC Worldwide. Therefore, by definition, in that particular instance the company that made it got a better deal by competition. Had that been the BBC that had made it they would not have got that extra money. That is essentially your argument? Mr McVay: Under the current arrangements we do not know! Q13 Chairman: Tony, is there plenty of BBC product that you would like to bid for if you had the chance? Mr Cohen: All the big dramas, all the big entertainment, we would be very happy to go in and bid for. Some of it we would absolutely really love to have. As an international company we need supply and we are very willing to pay for it. Q14 Chairman: Give us an example. What would you like to bid for? Mr Cohen: I would have liked to have had the right to bid for Strictly Come Dancing. That is in 26 countries around the world now. We have a lot of properties that are in that many territories. That would be a very good entertainment example. Could I offer one other thought to the Committee, that the purpose of benchmarking which was to simulate some kind of approximate, some kind of market rate. That is why benchmarking was put in place. We regard benchmarking as totally inadequate. The reason for that is, when you bid for a very big property, like a big drama, a big documentary, or a big entertainment show, in the open market those amounts are not disclosed; they are confidential. I do not know what my competitors would have bid when they have been successful. It is not bench-markable, and that is why we do not buy benchmarking as a replacement for a market mechanism. Q15 Philip Davies: I have got a great deal of sympathy with some of the concerns you are raising. Tony, I am getting slightly confused, in the sense that one of your allegations is that BBC Worldwide underpaid for BBC programmes, and they are not getting full market value. On the other hand, you also seem to complain that BBC Worldwide over-bids for the rights, talents and resources from third parties in your evidence. It seems to me you are trying to have it on all handles: one that they are under-bidding; and one that they are over-bidding. Even if the BBC stuff was put out for tender, as you would like to see, surely all that would happen is that the BBC Worldwide would over-bid for it and your second allegation would kick in? It seems to me that the BBC cannot really win whichever way they on this? Mr Cohen: They are two different things. The under-paying is about exposing BBC products to the market so they can be properly valued. Maybe BBC Worldwide would overpay. In the fullness of time you cannot overpay forever because you do not get that money back. What would be established is the market rate for those properties. When they are dealing with independent product in our knowledge they do tend to offer more money in quite a number of instances than we as commercial operators might bid. The question is: why would they be able to do that? I think it comes down to John and Charles's point that we do not have an transparency about how they make those decisions; and we do not know on what commercial return basis they make those investments. Q16 Philip Davies: You say that and indicate they are not a commercial organisation and, therefore, you cannot compete. In their accounts for the year last year they made a profit of £77 million; so they quite clearly are a commercial operator; and they are quite clearly operating on a commercial basis because they are making what most people consider a healthy profit. That does not sound to me as if they are not operating on commercial grounds? Mr Cohen: I would argue that the question we ask about that is: is that as much money as those properties that they have got to sell are worth? The number that you quote is what they show. Could they have earned more? I believe that had it been out for commercial bidding they might well have done. That money, I would suspect, also includes investments they make which are not separately disclosed. We do not know how much money they are investing in production companies. We do not know how much money they are investing in channels. That will all affect the net return to the BBC. Q17 Philip Davies: You have said they could have earned more, but you also said they are under-paying for all the BBC programmes. Presumably if you had your way they would be making less money, and not more money? Mr Cohen: The question is what the licence fee payer gets as a return, and what they BBC Worldwide gets as a return. Q18 Philip Davies: On the cross-directorships you are concerned about between BBC Worldwide and the executive, you mentioned earlier about how easy it was for the BBC to lose its reputation, as we are obviously seeing with Jonathan Ross and Russell Brand. BBC Worldwide was therefore an accident waiting to happen - I think you described it as potentially? Surely given that background it makes sense for the BBC to have people on the main board of the BBC and on the board of BBC Worldwide presumably to ensure that that damage to their reputation does not take place? Mr Cohen: I do not think people at board level are going to be exercising the kind of editorial control themselves; it is done by the system and by the people probably further down the organisation than people sitting on the boards. Our point about the boards is that they are required to keep separate the management of both of these parts of the BBC; and yet we see the cross-board membership pattern; and that must give them, in our view, an unfair commercial advantage because they know what the plans are for the future; and from BBC Worldwide's point of view they can have an impact on the planning of the BBC. Q19 Philip Davies: Is your suspicion that the BBC are making programmes using licence fee payers' money that they otherwise would not do, because they are not particularly a benefit public service broadcaster, but making the programmes specifically to sell commercially by BBC Worldwide, that they otherwise would not make? Mr Cohen: Are you asking about what they BBC might be doing? Q20 Philip Davies: Yes. Mr Cohen: I have got no evidence of that at all; but it seems to me quite possible that that influence will be brought to be bear on the BBC. Q21 Helen Southworth: Could I take you back to the process of whether or not Worldwide underbids and what impact that has on the return to the licence payer. I am hoping you can explain to me a couple of things. One is, if Worldwide were to underbid how this would be a net loss to the licence payer; because if it underbids for a programme that it then sells at a high profit and that profit is all returned to the BBC where has the licence payer lost in that process? The other question is: if the BBC were required to put all its programme sales out to a competitive tender process how much would that cost in terms of the administration of that process? How would that cost be returned to the licence payer? Mr McVay: Putting a number of programmes out to tender is sending an e-mail out to people who want to bid for it. It does not necessarily have to be a huge cost. This happens on a regular basis in all markets. If I am an independent producer and I have a programme and I want Tony to bid for it, or Shed, or Outright Productions, I can send an e-mail saying, "I'd like you to bid for this programme". Charles maybe wants to reflect on that as a producer who does this on a regular basis. Mr Wace: What we are interested in as an independent production company is: which distributor is going to give us the best possible return? If you are an in-house programme you do not have that option, because your programme has been taken directly to BBC Worldwide, for BBC Worldwide to sell that programme. On your point of the advance, the advance is obviously one aspect of it. We do not know that BBC Worldwide is necessarily selling the totality of all the BBC programming in the most efficient way it possibly could. The advance is just one element of it; but, in terms of the vast range of BBC programmes, will do better for more independent distribution companies to get involved, who would have more of a vested interest in selling those programmes individually than perhaps one great collective. We are not necessarily saying they would, but what we are saying is that until you actually put it out to the commercial market you will never know. Q22 Helen Southworth: You are really saying to me that the cost for a public body of putting things out to competitive tender is the cost of an e-mail? Mr Wace: I think what we are saying is that it is not a particularly expensive process. It is not necessarily more expensive than the process you already have in place at the moment, because there are independent distributors who would be happy to take up that slack at the moment. They would be happy to get involved in that process. Mr Cohen: I am sure the BBC would claim that it is extremely expensive and very difficult to do. I do not agree that it would be very difficult to do because we run auctions all the time. The answer to your question, I think, is we believe that the extra value generated by the bidding process would more than outweigh whatever the administration costs were of doing the bidding process. Q23 Helen Southworth: Would you be able to give us evidence of those things? You operate in a commercial environment so presumably you do have evidence of those processes? Mr Cohen: Yes, and they are basically e-mails. You need a lawyer and an accountant to have a look at whether it fulfils the criteria for brand protection, for capability, for the chance they are going to pay the money, and that is really not much more complicated. Mr McVay: T be clear, the BBC already has a department that does this, called the Commercial Rights Agency, which is meant to achieve the best price. It is already paid for; there is a department there; it would not be an additional cost. You could basically say to that department, "Instead of guaranteeing all the programming to Worldwide, could you make sure you offer it up to other people to bid for it". There are already people paid for by the licence fee to do that, so I do not accept there would be additional cost. There may be a few more e-mails, but I do not think it is an additional cost to the licence fee payer. Q24 Helen Southworth: The other question is about where the net loss to the licence payer is if, as you are speculating, Worldwide underbids but makes a profit and then returns the profit. Mr Cohen: It would be flushed out by the competition process itself. Different distributors at different production companies will value programmes differently, depending upon their capability and what they think they can make for it. At the moment the BBC is in a position where it gives its properties to BBC Worldwide. There is no competition from other companies which do similar kinds of things who, by the way, might value it quite differently in terms of what they want to pay for the rights to do something. We cannot prove that to you, but we will not know until it is tried. Q25 Paul
Farrelly: I am sympathetic to some of
the arguments and evidence we have heard particularly over the BBC's
acquisitions policy. I must say, Mr
Cohen, I am not terribly persuaded by your argument. For instance, if you were FreemantleMoters
rather than FreemantleMedia and you went to the States and complained that Ford
International has first look at all Ford cars, I suspect you would be laughed
out of Mr Cohen: The first point is that I do not really agree with you about the Ford motor example because the Ford motorcars are not made by money that comes from the licence fee payer. It is a commercial company; it takes risk on making its cars, in the way that we take risks on productions. Q26 Paul Farrelly: We are the shareholders. Mr Cohen: It is basically public money that is going into these programmes. It is not a risk investment by the shareholders in the way that your Ford motorcar example is. Your other point was that you would see in the profits the results of consistent overbidding, and that would be true if we could see it, but we do not know. Those accounts that we do have do not show by area what the different parts of BBC Worldwide are contributing from the investments they make in other people's programming, from the channels that they launch; we just do not know. You may be right; I would not argue about it, except that our experience is anecdotally that they seem to pay very high. Q27 Paul Farrelly: Any set of accounts will mix in all sorts of things. It is very hard without going into the underlying figures to find out the truth. That is the same with FreemantleMedia - if we wanted a comparison would you be able to give us that level of disclosure that we might demand from the BBC; or would you say that is commercially confidential? Mr Cohen: I can split it out by business segment, and indeed I do every day because I want to know how profitable each segment is for my shareholder as well as for my management. BBC Worldwide is a company which has a special relationship with the BBC and has particular oversight issues that it causes because of the impact it has on the market. That is why the disclosure request that we all have here is so much more important. Mr McVay: The point you made quite rightly is that we are all shareholders. I think as shareholders we should have the information to let us judge. It may be maximising profits - that may be absolutely right and proper; but I think we need to be very confident. How is it doing it; is it minimising reputational risk; is it maximising return; and is it doing in a way which is consistent with best commercial practice? We are not saying that WorldWide should not be a commercial organisation and it should be aggressively marketing the products and rights that it has acquired; but as shareholders all of us need to be assured that it is doing it in a way which is efficient and gives a return back to the public. Q28 Paul Farrelly: Clearly there has been a concern over some things the BBC is doing particularly. Buying Lonely Planet, which is a well known brand, it is not a name people did not know that the BBC could develop as a brand; it is a well known brand. It is not the BBC developing its own brand. Taking stakes in overseas companies which then have a further first right of refusal is also an area of discomfort. Also clearly the BBC now in these times has the advantage of a public source of funding for acquisitions which may not be open to private companies. It is the BBC bank really. That is another area where scrutiny is required. John, you mentioned Freehand and the Joker Poker example, is this an isolated example? In terms of the BBC's reputation, are there other examples of acquisitions? Mr McVay: You will be talking about Lonely Planet no doubt later on in today's session so I will not
touch on that, because it is not an area in which we are particular expert in
terms of publishing. One area we do have
to question is the joint venture in Q29 Paul Farrelly: To produce? Mr McVay: Grazia
in Q30 Paul
Farrelly: Do you think Grazia in Mr McVay: Probably not. I am sure it is a fantastic product and I am not casting any doubt on the product or the people from The Times of India who make the product at all. I think that is fine. The question is: why is Worldwide venturing licence fee payers' money in a venture like that? Whether they are subject to editorial control or not, the question is: what has that got to do with the BBC? Mr Cohen: I think the same is true about the production companies. Joker Poker may be just the particulars of Freehand, but the issue for us is that they are taking these stakes at all. It is not necessary for the BBC to take stakes in production companies in order to get the best commercial return from its programming and its formats. Q31 Chairman: It is part of the deal that if they take a stake in a production company in any one of these countries then from that moment on that production company has exclusive rights to BBC properties? Mr Cohen: It has a first right in all of those cases, yes. Q32 Chairman: Is it possible for you to compare how much the BBC is getting for a BBC product in a country where it has a stake in a production house and, therefore, there is only one bidder, if you like, and another country where it does not and presumably goes out to competition? Mr Cohen: It would be possible to do that analysis, but this is in the last year that this has all been happening. I think it is too recent for us, even if we had visibility, to be able to answer that question. Mr McVay: I am sure Worldwide could answer that question for you. Q33 Paul Farrelly: We have mentioned Merlin and clearly BBC Worldwide has taken the view that it cannot make as much money out of Merlin as you think you can, and therefore was not successful unless it was a sot to the market. Are there any examples at all of the BBC making its own programmes where WorldWide has not taken them up, but the independent sector has done? Mr McVay: At the margins. Mr Cohen: There are a few. I am very happy, if the Committee would like, to send you a list of the programmes that we know about but it is a handful and I have not heard of most of them. Q34 Helen Southworth: Are you confident that the BBC Trust has an effective audit and reporting process to make sure that there is not a cross-subsidy between, for example, getting a low price for a BBC product and paying a high price for an external product? Are you confident it is in place at the moment? Mr McVay: No. I think we would encourage the BBC Trust to look carefully at how it can have greater oversight of the functions of the BBC's commercial arm. Currently it does not per se. It is the Executive Board that oversees BBC Worldwide. Mr Cohen: I have nothing to add to that. The Trust does not take notice of things at that level. The £50 million is their threshold where they must take notice; and below that, as I understand it, is whether they wish to take notice or not. As John says, the first port of call for all of these evaluations would be the Executive Board. Chairman: We need to move on to our next session, so can I thank the three of you very much. Memoranda submitted by TimeOut, the Guardian Media Group and Wanderlust Examination of Witnesses Witnesses: Mr Tony Elliot, TimeOut, Ms Carolyn McCall, Chief Executive, Guardian Media Group and Ms Lyn Hughes, Editor-in-chief, Wanderlust, gave evidence.
Chairman: For the second part of our session, which roughly corresponds to the publishers, can I welcome Tony Elliot, the Chairman of the TimeOut Group, Carolyn McCall, the Chief Executive of the Guardian Media Group, and Lyn Hughes, the Editor-in-chief of Wanderlust publications. Q35 Mr Sanders: Commercial success achieved by BBC Worldwide obviously reduces the reliance on the licence fee. Why, therefore, should we be concerned by the growth of BBC Worldwide. Ms McCall: Could I just say first that the Guardian Media Group is a great supporter of the BBC, of its concept, of the fact that it is licence fee funded, and on its ability to raise additional funds through exploiting its programming and its core content. In answer to your question, we believe the rules surrounding BBC Worldwide's activities have been loosened significantly since 2007, where the BBC Worldwide is creating new brands and they are acquiring businesses; and that is having a detrimental effect on commercial players and, therefore, on commercial plurality. We have made some very specific recommendations because we believe to address these problems the Trust should tighten the rules governing BBC Worldwide; there should be greater transparency about the oversight of Worldwide; and there needs to be a greater separation between the strategic role of the Trust and the regulatory role of the Trust, which we believe is extremely confused and leads to some considerable problems for the commercial sector but also to licence fee payers. Specifically in our submission we have said that we believe BBC Worldwide should go back to the pre-2007 fair trading rules, and that this investment figure of £50 million should be reduced quite considerably, and we can go into that. To your question - which is: is it just about the success of Worldwide? - no, we want Worldwide to be successful; it is simply about the boundaries that are set for Worldwide's activities that we are concerned about. Ms Hughes: We have been absolutely passionate about the BBC, and I myself have done a lot of work for the BBC, for the radio in particular, and have always been proud of the BBC around the world; but BBC Worldwide seems to be an out of control juggernaut at the moment. BBC Magazines in particular seems to be totally out of control. It is now the third biggest magazine publisher in the country. It has something like 40% of the children's magazines market. Whereas it used to argue that its magazines were in support of BBC programming, for instance, say, Top Gear magazine, they do not have a Lonely Planet television programme, so why therefore are they launching a Lonely Planet magazine? It has no direct link to any BBC programming at all. How on earth can that be justified? Mr Elliot: I would also like to stress my support for the BBC. Q36 Chairman: I think in future we will take as read that everybody supports the BBC and move straight on, if we may! Mr Elliot: There are clearly some real problems with the
structure and the remit for Worldwide.
In very simple terms, I think where the external agency is exploiting
assets that come out of the broadcasting system, it is absolutely straightforward. I think we would all applaud their
exploitation of the Top Gear magazine
around the world, and they can do whatever they like in terms of the number of
programmes with that all around the world; but when they take quantum leaps into areas
that have nothing to do with the BBC as a broadcasting entity and a British
brand et cetera you have to ask yourself:
what is going on here? One
example which I would like to get on the record is that they are the co-publishers
through a joint venture of Hello
magazine, which they license in Q37 Paul Farrelly: It is Hello and Grazia, is it? Mr Elliot: They do Grazia as well. There are a number of them. You do have to say to yourself: why? I would also like to say, because I think this is important, I do know a lot of people at the BBC and see them and most of them say they do not know what is going on with Worldwide. They all say they do not know what they are doing. There is not a clear enough brief. They will all hasten to say, "But it's great. They make money for us to make programmes with"; but there is deep, deep concern culturally across the whole organisation about the activities. Paul Farrelly: I am a former employee of the Guardian Media Group and, if there is any money left in the pot, a pensioner as well! Q38 Helen Southworth: I wanted to ask if you could perhaps expand on the governance side of the BBC Trust and on the reference up of the £50 million cut-off point. How do you think that should be changed? What level of scrutiny should the Trust be having, and what sort of mechanism should they have in place to report through to them? Ms McCall: I think for us it is extremely confusing to see the Trust as regulator and having a strategic role. I will give you one specific example of that - local video - although I know is not in the remit of this particular Committee but it is a good example of where this gets very confused. The Trust has made it clear to management that it is a strategic imperative to enter local. They are not really in local video; they are not in it at all, and they plan to spend £68 million on this. When we then engage with the Trust and say, "We have a real problem with local video", who are we talking to, the regulator or someone championing the BBC in local? It is a very difficult distinction to make. The Chairman of the Trust has actually come out and dismissed regional press's issues with this. £68 million is a lot of money; just as £50 million is a lot of money. To give you an example: in local we spent £1/2 million on a website to do an entertainment website in the north-west, so £68 million is a lot of money. I think the first issue is, there have been lots of options discussed; the Burns Report made an option about separating regulation from the Trust. I think there are so many options that could be discussed, I think the key thing for us is that a regulator should be unambiguously a regulator; that is all they should do - regulate. That is the first thing. On the £50 million, again to give you an example, £50 million is a lot of money. Only the BBC could say £50 million was not a lot of money, because if you are a commercial player, for example, Guardian.co.uk, the leading website in this country for quality newspapers, has probably in eight years not spent £50 million of investment in that site. I think £50 million is a ludicrously high figure for the Trust to have to scrutinise. It needs to be considerably lower than that. I would make the case that it should be benchmarked against other boards, not just plc boards but media boards, because a lot of media, as you know, is not in plc hands; some are and some are not. Q39 Helen
Southworth: I am sure you will not be at all
surprised to know that the Guardian Series newspaper, with its huge impact on Ms McCall: I think it is a really big issue. A lot of these nascent websites are new businesses, embryonic businesses, that need the oxygen to survive. When the BBC enters any market it enters aggressively; it has deep pockets, it has a big brand, it therefore can decimate competition very easily. The reason the Manchester Evening News in your constituency will have been very vocal about this is that they are fighting for their survival. That is not a dramatic phrase. Margins in the regional press are being squeezed very, very hard and therefore the issue for me is significant, not simply because I am a publisher but because I think this plays to diversity, to plurality and to democracy. I think it is about citizenship in a democracy and I think if you start losing local newspapers, local websites, you will end up having a very strong BBC and nothing else. Q40 Helen Southworth: Any other comments? Ms Hughes: I would just agree that £50 million is astoundingly high. I only really know about magazines and about
travel but £50 million could buy 50 magazines without the Trust's
approval. It is a ridiculous
threshold. As Carolyn said, I do not think
there is any other company in the Mr Elliot: In very trite terms, I do not think there should be any financial level because it should be to do with the nature of what they are going to do. There may be activities in this country or elsewhere where just the nature of the BBC's involvement in something, by virtue of the brand and the promotional activity and all the rest that goes with it, confers an enormous responsibility on the Trust to make sure that this monolithic organisation, which we all want to succeed, goes forward in a way that is built to last. Just doing it on a financial level I do not understand. Clearly, within that perspective, £50 million is a nonsense. The other issue which I think we are touching on, and it is incredibly important, and has caught everybody a bit by surprise, is this whole issue of the BBC and its online activities and where on earth in this new age the borders are to be drawn. None of us would have any problems where they are clearly extending what they already do with news, sport, probably even commentary related to news and so on. I happen to have a friend who was the facilitator at a conference attended by all the top people at the BBC involved in online, and they were having a serious conversation about whether the BBC's website should be a "go to" source for anything in the world. That clearly would give them carte blanche to go and buy anything to do that. It is very admirable, and I think, frankly, they could possibly do that with yet more public money but somebody has to get a grip on this. I do not think anybody who is involved here believes that the Trust has certainly the track record, because it has not been around long enough. It certainly has the facilities - 62 people who work for it and a budget of £11 million, which is in the BBC report. They clearly could do a job but I do not think they realise what they are dealing with long term. Q41 Janet Anderson: I would just like to pursue on how damaging you think this new proposal from the BBC would be for local newspapers. I have some excellent local newspapers: the Rossendale Free Press, which is part of your Group, Carolyn, and of course, the Lancashire Telegraph. I have a letter here from Kevin Young, who is the editor of the Lancashire Telegraph and he is saying that what the BBC is planning to spend £68 million on is virtually creating 65 online local newspapers. He says in his letter - and I will not read all of it - "If it is allowed to go ahead, the BBC will almost certainly continue to bolster its service by lifting news from local newspapers free of charge, it will heavily promote its services and its news, sport and user-generated content and will be in direct competition with newspapers like mine, its website and mobile messaging service." Do you think if this goes ahead that local newspapers like that will actually go out of business? Ms McCall: I am afraid I do. I think there are two major issues here. One is that competition law at the moment does not allow local newspapers to be bought by each other. We have an example, which I am sure will come up in the next session, of seven local newspapers being closed rather than being sold because they were not allowed to be sold to another newspaper publisher, who could actually get synergies and cost savings. It would have led to the survival of those papers, or at least some of those papers, where they actually closed. I think you have a real example of how tough it is for regional newspapers at the moment. There has been structural change in this industry for at least eight years, probably more, and we are now being hammered by the downturn and the recession, which is at least two years in the running. There are some severe issues in the regional press, so I think he is right to say that. I think the second issue is about the BBC themselves. You cannot have a local website without video. It has taken most publishers quite a long time to be able to get the investment to do video and to actually try and justify video in a return on investment type basis. What is the return on investment? It would be advertising-funded. We are having to go through quite a lot of pain to justify the capital expenditure required to do local video on websites, because at the moment websites do not have the return on investment that a commercial player would look to, so you are having to take risk. The BBC will be able to do local video much more quickly, with much deeper pockets, and they will be able to leapfrog the regional press in terms of what they can do in local media. That is going to be unbelievably damaging for local press. They might not be able to survive that kind of onslaught at a time when there is a cyclical depression as well. Q42 Paul Farrelly: Just in terms of benchmarking, Carolyn, can I ask you what level of investment, be it an acquisition or for a single programme, would the Scott Trust get involved in? Ms McCall: It would not be the Scott Trust. It would be the Guardian Media Group board, which is the company that runs all our businesses, which include Trader Media Group, Auto Trader, Emap, Business 2 Business, as well as the Guardian, the Observer, regional press and radio. We would declare anything over £5 million. Q43 Paul Farrelly: The Scott Trust board, to use an analogy with the BBC, is also responsible for ensuring that the Guardian Media Group operates in accordance with the Trust's aims and ambitions. Would the Scott Trust board get involved in any way? Ms McCall: The Scott Trust would be informed of all potential acquisitions, all disposals, all mergers, and in fact we would do that on relatively small things but we would do that for information because our constitution is that the Group board is commercially responsible for the running of the company, which includes acquisitions. Q44 Paul Farrelly: So in the way that the Scott Trust operates, in the way that the BBC Trust is alleged to operate, it is simply informed by management of what management is going to do? Ms McCall: The Scott Trust on big acquisitions will take a view but it is not its primary purpose. Its primary purpose is to secure the independence of the Guardian, the editorial independence of the Guardian, which is my point really about the BBC Trust. If the BBC Trust is there to secure the editorial integrity and process and diligence of the content of the BBC, that is fine. It also is the regulator of that and that is where I think there is a problem. Q45 Paul Farrelly: I just want to come to Lonely Planet now specifically. I thought, Chair, we had established the last time we saw the BBC the price that was paid and that we could see the acquisition agreements and we could ensure that any earn-out arrangements were above board and so on. I am surprised to hear that you do not know how much the BBC paid. We need to rectify that when we next see the BBC. It is a long time since I have looked at the Yellow Book of the Stock Exchange but in terms of the size compared with the BBC's profits, certainly you would expect a far higher level of disclosure from a public limited company and that may be the same parallel that we should use with the BBC. In terms of Lonely Planet, can you just describe to us the circumstances of the sale of Lonely Planet? Was it put up for auction by its owners? Did other companies have the opportunity to bid alongside BBC Worldwide, including yourselves? Mr Elliot: I knew that the Lonely Planet founders, the Wheelers, were looking for investors because I had a conversation with Lachlan Murdoch, who came to talk to me, and by the way said Time Out was a better brand than Lonely Planet. What happened really was that the people from BBC Worldwide - and there is a background dimension to this that we should be aware of, which is that the Trust has charged Worldwide to hit certain targets. People from the Worldwide scouting expedition, as it were, happened to come across the Wheelers, as far as I understand, and it was to some degree a marriage made in heaven because in the same way that, frankly, if I wanted to sell Time Out, the BBC would be a very good home for it in terms of quality of content and all the rest of it. I do not know the full details but they had obviously made very little progress in finding other purchasers or people to invest, and a deal went off like a train basically, and by all accounts from what we can tell from the figures, the sums of money were very high compared to what one would have thought. I think if Lonely Planet were sold today, my guess is that it is probably worth about £30 million or £35 million. There is a lot of fine detail, as you know, in our evidence of the background to this but there was floated the idea that there was an auction, that there was a competitive process, but we remain unconvinced that there was a genuine competitive process behind that, and we felt that was being used to push the Trust along quickly in its decision-making. We have not heard any evidence from any person in the book publishing business about serious bids for Lonely Planet. Ms McCall: Could I reinforce that just simply by saying that the reason Guardian Media Group were talked to about Lonely Planet was that our former Marketing Manager is their Managing Director, so we had a very informal conversation with them, which was so loose that it could not be construed as a pitch for anything. We were surprised when it went to the BBC, and when we went back and asked what had happened, we were told there was no way actually we could have competed with the BBC on that because what the BBC had to offer was just so vast in comparison to a publisher, because of TV rights and so on, that had we been interested in bidding, we would not have been able to put in a bid that was in any way comparable. Q46 Paul Farrelly: Whether there was a competitive bidding process or not is not a matter for the BBC; it is a matter for the Wheelers, but as far as you are aware, there was no merchant bank appointed, no information memorandum freely circulated? Mr Elliot: I think they did it themselves. It was fairly low-key. Q47 Paul Farrelly: The question for us clearly is whether the BBC has in any way overpaid so that it cannot possibly get a decent return on its money. Mr Elliot: Carolyn and I can both talk to the issue of trying to make money out of websites, which is very, and the real value of the publishing side was £20 million. There is a huge amount of goodwill there which is basically going to be clawed back over time from trading on the website and maybe or maybe not through some kind of write-off through programming or whatever. Ms McCall: I think the point is actually further back than that. I do not think it is about Lonely Planet. I think it is risking licence payers' money and my question is, why is the BBC allowed to acquire something which is so far removed from any core content or core programming? The pre-2007 guidelines were very clear. They were uncomfortable in some ways. Top Gear is ferociously competitive and formidable as a brand but we can live with that because it comes from core content of the BBC. The guidelines' fair trade ruling was that things should plainly arise from and support BBC programmes. Lonely Planet does not do that and I think that is the fundamental problem with Lonely Planet, despite all of the other things we are talking about in terms of value and fair value and whether it was anti-competitive in terms of the process. Actually, I think those things do not even matter because I do not understand why they were allowed to buy something like that. Q48 Paul Farrelly: I take that point as the final question. That is clearly the substantive point we will want to consider. There is also the use and level of use of licence fee payers' money. I do not want to disparage, Lyn, your company, or yours, Tony, but the Guardian Media Group is a quantum size above you and has access to lots of finance to buy 75 per cent of the company, as has the BBC, but, Carolyn, when you say that your bid could not compare, presumably in terms of the development of the brand and therefore the returns that flow through for the extra 25 per cent, the implication is that there is a nice, juicy earn-out formula attached to the rest of the shares that the BBC does not own in terms of either the owner's future rewards or the management of Lonely Planet's financial performance. Ms McCall: At the moment Lonely Planet is losing money and I think it would be questionable over the next two or three years, given the economy and the advertising climate, whether that would make money because it is advertising funded. Tony's point earlier: the BBC talk a lot about passion sites at the moment. When they talk about Top Gear as a passion site or Good Food as a passion site, OK, it is competitive but we can live with that. When they start talking about BBC Green as a passion site - they do not have a programme called "BBC Green". If you go to bbc.co.uk/environment you can access all their environmental coverage, you can access natural history, science, nature. You can access all of the BBC's content, so it is available there for licence fee payers. What they are doing is purely commercial. They are saying, "We are going to create a new band." When you look at this market, again, there are at least eight websites already struggling to see where the return is going to come in the area of environment. There is New Scientist, there is ourselves, there is the Times, the Telegraph, Telegraph Earth, a whole range of sites. There is Tree Hugger, which is owned by Discovery. You just wonder why the BBC is being allowed to go into something called BBC Green purely to make a commercial risk. It is risk, so one, it is risky so it is risking licence fee money, which they could be reinvesting in something like original and distinctive programming, and two, they are distorting the market for commercial players because they can cross-promote, they can do a magazine and do all of this other activity. That for us is a massive concern. Paul Farrelly: We are coming to that. We just wanted to understand the circumstances around the Lonely Planet acquisition that made it so special, quite apart from them buying a brand. Q49 Chairman: Carolyn, you said that you did not have a great objection to Top Gear magazine because it was clearly linked to a programme. Would you not like to have the right yourself to publish Top Gear magazine? Ms McCall: We publish Auto Trader magazine so... Actually no, I think they created the magazine, they launched the website and that is their intellectual property, so no, I would not want to be bidding for Top Gear unless it were for sale, and then we would consider it. Q50 Chairman: There is an argument in parallel to Tony Cohen's argument that the licence fee payer would get more money if it was put out to tender to magazine publishers who have an in-house, exclusive right. Ms McCall: It depends on Top Gear, does it not? Top Gear, it seems to me, is one of the most important programmes for the BBC and it is also one of the most important programmes that they exploit in terms of rights. It is doing very well for the BBC now. I cannot comment on Tony because I am not in that sector. I do not know whether they could get more money by putting that on the open market. From our perspective, although they are very difficult to compete with and they have a website which is a very strong website, we understand the parameters by which they are doing Top Gear. It is clear why they do it. Our issue is not about competition with the BBC. We compete with them in virtually every sector we operate in, including radio, where they are completely unregulated and we are highly regulated. So we are used to competition with the BBC. The issue for us is Worldwide's boundaries have got so blurred, they are so wide, we do not know where they are coming from, we do not know what they are going to bid for, we do not know what they are going to launch. It could be anything because public purpose could be interpreted in a number of different ways. The post-2007 guidelines have said that they can do anything that fits the public purpose and that is what is causing us a significant problem. Mr Elliot: Could I just give some background to the question because I think the point is important. The world is now covered with an incredibly sophisticated licensing system for titles. We license Time Out in something like 22 countries now. If somebody decided to close down Worldwide completely, your underlying question about the Top Gear magazine is that that, in today's environment, would be taken up by licensees, and I cannot believe there would be less money going back to the BBC at all. In fact, there might very well be more. So do not let them come in here and tell you you cannot make comments on that. Q51 Chairman: You have argued that the BBC's acquisition of Lonely Planet, or 75 per cent of it, is too far removed from their core purpose and has no real relation. Did you not have conversations yourself with the BBC about the BBC acquiring a stake in Time Out? Mr Elliot: No. That has been misinterpreted. The background there is that there have been a number of conversations over the last six, seven or eight years at different points in time, a lot of them to do with Peter Phippen, who you obviously know or will know very well, about ways that Time Out might work with the BBC. One of the frustrations has always been that they have always said that they did not want to work with us either as a minority shareholder or even on an arm's length deal, that they wanted to buy us, and every time I saw Peter I just said, "Why have you got brought that up again? You know that is not going to work." Our view with the BBC is that we say adamantly that we do information which they do not do - information about cities all round the world, obviously information about London, which we could extend to other cities in this country - and, given that they are a public utility, an essential public information utility, why should they not integrate in some way our information into their system? An example that I have often mentioned is that we would like to provide - and I had a conversation with Jenny Abramsky, which is that we would like to supply Time Out information to all their radio stations so that they had better information about what was happening with music, clubs and bars and things like that. One of the underlying problems - and I think this is a really important long-term thing for the BBC - is how they work with other brands in partnerships or relationships or whatever, particularly in this online, moving environment. They cannot constantly say it has to be the BBC only. It is not a viable way through for the rest of the world for the future. Q52 Chairman: So you were looking to establish a commercial relationship with the BBC? Mr Elliot: Yes. Q53 Chairman: You said they insisted on talking about wishing to acquire the group but you gave the impression that you would have been content for them to take a minority shareholding. Mr Elliot: There was definitely a moment, I think about three or four years ago, when we were looking for money to develop our online, where we asked Worldwide if they would be interested in taking a stake, and they said they would not be. Q54 Chairman: Would that not have been far removed from the core purpose of the BBC? Mr Elliot: Not if it had been what I was trying to talk to them about then,
which was a conscious policy effort to have a close relationship with an
information provider who was doing something that added to doing something they
did not do and therefore added to their offering to the Q55 Paul Farrelly: I think the Manchester Evening News would go berserk if you were tied up with the BBC. Mr Elliot: I have said this on the record. We have never, ever wanted an exclusive arrangement with the BBC in any field. I think, for example, on the Lonely Planet and the Worldwide Web site it would be appropriate for the BBC to have a button that says "travel" alongside "sport" or "news" and I think they should have information there from everybody, frankly, as a host. Q56 Chairman: Can we come to Lonely Planet magazine? Lyn, I know you are extremely concerned about the launch of Lonely Planet magazine. Do you regard it as potentially a threat to the survival of your business? Ms Hughes: Very much so. The travel
magazine business in the Q57 Chairman: That is bad news for Tony. Ms Hughes: We are very much in that territory. We have always had very close links with Lonely Planet and we have always given the guidebooks very good mentions. We have used a lot of their authors. Ditto: we obviously publicise the BBC travel and television programmes, the ones that fall into that sector, and indeed, in our next issue, which comes out on 20 November - which is the same date that the first issue of Lonely Planet is due out - quite a coincidence - we do actually have several BBC personalities who have contributed to Wanderlust such as Michael Palin, Kate Humble, and Jonathan Scott, because they are all huge fans of the magazine and this is a very special issue for us. So yes, obviously competition we know could come along at any time. There have been a lot of titles that have launched against us in the past 15 years. At least a dozen, maybe as many as 20 magazines have launched against us. They have come and gone. We are not smug about that but we have worked very, very hard to be in the position that we are in. I would question though why any travel magazine would be launching at this time. Carolyn has already touched on the recession. Airlines are going out of business. There is a very cold wind going through the travel industry. Holidays are being slashed. I know that our advertisers are finding it tough at the moment. The phone has not been ringing for them for the last month or so. No other magazine publisher would be launching a travel magazine at this time. If they said they were, we would think they were completely daft, so why is the BBC launching a travel magazine at this, the worst possible time? I can only think it is because they are fairly smug, in that they know they have a safety net, they feel secure. They do not need to make money. They have deep pockets. They could carry this magazine, for whatever purpose they want this magazine for, for the next few years so that is definitely unfair competition. Q58 Chairman: You have just announced the stake in Wanderlust that has been taken by Haymarket, so clearly Haymarket view your future as perhaps rather brighter than you do. Ms Hughes: Yes. That was announced yesterday. Indeed, one of the top publishers, Haymarket, has bought a minority stake in Wanderlust. They have been wanting to buy us for years and we have turned them down but they have actually now bought some shares from one of my shareholders. We are very excited about it. It does offer opportunities obviously to work with a bigger publisher with their expertise and knowledge. However, the fact still is that we are an independent company, we are going to be autonomous, it is the same team from the same office. It is only a minority stake that they have bought. Ms McCall: Can I give you an example in another sector of BBC magazine activity? An Australian company franchises a magazine called Delicious. BBC Magazines bid for it. A company called Seven, which the Guardian Media Group owns 40 per cent of, bid for it too. Seven was awarded Delicious. It now publishes Delicious in this country. The BBC launched a magazine called Olive targeted at exactly the same audience with a very similar style and tone to Delicious. It has no programme called Olive. It already has the Good Food magazine and it makes does very well on that. Delicious has never made a profit and is going to struggle, I think, to make a profit in the future as a result of having what we believe was a spoiler in the market directly by the BBC against a commercial venture. It was a difficult market anyway, made far more difficult by the advent of a magazine which had absolutely no core content before a new launch. That is a really specific example, and I can tell you that Delicious has not been profitable and it has been in existence for four years. Q59 Paul Farrelly: Is that a deliberate example of pique at not being successful? Sour grapes? Ms McCall: I do not know. I would not want to discuss their motives. I do not think they do things out of spite. I think they actually sometimes do not realise quite the consequence they have in the commercial market. It is incredibly difficult operating in the magazine market and in the web market. It was before the recession; it is going to be much more difficult now. Ms Hughes: But I do think in this case that this must be fairly deliberate, what they are doing with us and how they have targeted us. We do not know what their motives really are but the fact is they are coming out with their first issue on the same date that we celebrate our anniversary, our 100th issue. They are phoning round my advertisers and they are undercutting our advertising rates. They are doing special deals at the moment. When you look at the figures, they were putting forward quite a modest circulation figure that they are anticipating in the next year, which is very much in line with what Wanderlust and the other two main travel magazines sell. So when I look at the advertising rates that they are offering my advertisers, I really do not see how the numbers stack up anyway and how they are going to make any profit. They are not, on those rates. You have to question why they are doing it. I do think they are being deliberately aggressive. Q60 Paul Farrelly: We have seen some pretty vicious spoilers and price wars in the newspapers, from Rupert Murdoch to the protection of the position of the Evening Standard. Guardian Media Group would not take kindly to somebody trampling over its patch and threatening Manchester Evening News. Is your complaint that actually they are just being as nasty as the rest of them? Ms Hughes: They are, but you do not expect that of the BBC, do you? We love them. Ms McCall: I think it is not because of that at all. I have absolutely no problem with competition. My point is the point we have been talking about quite a lot today, which is the principle: why are they entering markets? Why are they embarking on activities that are about acquisition, about creating new brands, when there are already markets that exist? There is no market failure. They are going to come in and create market failure if they are not careful. I have absolutely no issue with them doing what they did pre 2007, although it is uncomfortable, it is competitive, it is aggressive, and it is from the BBC. They are no nicer than anybody else that we compete with. They are simply now going so far away from their original guidelines, the fair trade rule guidelines, that they are creating uncertainty in the market. People cannot plan against their activity. You do not know where it is coming from and you do not know when it is coming and you do not know what they are going to pay. There is no banker that can tell you what the BBC would pay for an acquisition in a certain market because they do not follow the same economic rules as other companies. That is the principle and that is the problem. Q61 Helen Southworth: I have a very quick question to ask about governance. Is the BBC Trust effective in ensuring that BBC Worldwide does not create market failure and does not have a market failure specific indicator when it is evaluating what investment it should go into? Ms McCall: No. Q62 Helen Southworth: Or should they have one? Mr Elliot: Yes, I think they should have as much as possible and we should be able to see it. When we asked for all the information on the Lonely Planet acquisition, which was black and white, had a beginning, a middle and an end - we wanted all the information and we asked for that under the Freedom of Information Act - we only got 35 per cent because a lot of it was censored, frankly. Ms McCall: It was not transparent at all. Mr Elliot: It was not transparent and it certainly looked like they did not do it very thoroughly, frankly. Q63 Helen Southworth: Should there be a scrutiny process on that specific point? Mr Elliot: Yes. Ms McCall: Yes. I think one of the big issues about the Trust is it is not scrutinising the activities of Worldwide, nor does it seem are BBC management actually. So there are issues about transparency, clarity and scrutiny around Worldwide. Q64 Paul Farrelly: The final question, and this is another area which is very uncomfortable for the BBC. You have mentioned the passion websites and the roll-out of more BBC websites. The question is, how appropriate is it for the BBC to accept advertising on bbc.com websites? Ms McCall: In 2007 they made it clear that they were going to carry advertising on bbc.com, which broke a precedent. They did that because it was international and the licence fee is not allowed to fund international development. So, again, at least there was some clarity around that. We would have a significant issue, I think, if the BBC started carrying advertising on what they called passion sites. For a start, we have an issue with what passion sites are. Are they core programmes or are they anything they like? That is the first problem. The second is that as soon as they start carrying advertising, they are carrying advertising on licence fee-funded websites effectively, and that does not seem the right way to go because they will end up distorting the advertising market by doing so. Q65 Paul Farrelly: Have you seen evidence that they are going to do that inside the firewall? Ms McCall: They are doing that on BBC Green now. There is a McDonalds advertisement on BBC Green already. Mr Elliot: I just think it is disingenuous in the extreme to say that the world changes when you go beyond the White Cliffs of Dover with online. It is just ridiculous. There should be one agreed way of doing things. Q66 Paul Farrelly: You are saying the wall has already been breached? Ms McCall: Yes. I think at the moment they are selling ads on BBC Green. Chairman: We are going to have to move on to our final session but can I thank all three of you very much for your evidence. Memoranda submitted by RadioCentre and the Newspaper Society Examination of Witnesses Witnesses: Mr Andrew Harrison, Chief Executive, RadioCentre; Ms Sly Bailey, Chief Executive, and Mr Paul Vickers, Group Legal Director, Trinity Mirror plc; and Ms Santha Rasaiah, Director of Political, Editorial and Regulatory Affairs, Newspaper Society, gave evidence. Q67 Chairman: For the final part of this morning's session I welcome Sly Bailey, the Chief Executive of Trinity Mirror, and Paul Vickers, the Group Legal Director; Andrew Harrison, the Chief Executive of RadioCentre; and Santha Rasaiah, the Political, Editorial and Regulatory Affairs Director of the Newspaper Society. Can we perhaps start with audio? Can I ask you, Andrew, what impact the growth of BBC Worldwide is having on your members? Mr Harrison: The major impact the growth of BBC Worldwide potentially has on our members is the focus potentially on audio, video and music content going forward. Like a number of your earlier witnesses, we have seen many of the difficulties of the potential lack of separation between the role of the Trust and the role of the Executive of the BBC and then indeed the role of the management of BBC Worldwide, separating out what are specific activities that are legitimate within the commercial operations of Worldwide and what potentially risk foreclosing markets or distorting markets. This is a particular concern for us from a radio and audio perspective going forward because of the potential opportunity the BBC has to monetise their very extensive audio archives that go right back to, for example, the beginnings of popular music and so on and the opportunity to distort markets as they then potentially make that content available for sale. Q68 Alan Keen: There is going to be an even bigger debate than we are having now about the BBC over the next few years. First of all, would you elaborate a little further, Andrew, on how you feel the BBC should run itself when you are looking at competition with your affiliates. Mr Harrison: The commercial radio sector is a very small sector, quite a fragile
part of the Q69 Alan
Keen: If I can give you an example of my own
obsession, football, in Mr Harrison: If you take, for example, the football rights, which is a very
interesting point, the vast majority of Premier League football rights in the Q70 Chairman: I am slightly concerned that we are straying a little way from the commercial activities. Obviously, this is a core BBC activity. In terms of Worldwide, the BBC is dominant in the radio sector, with a 56 per cent or thereabouts audience share. It obviously has a lot programme content which is valuable. You presumably would accept that that content should be made available through podcasting and CD sales and downloading. Is it your argument that the BBC should not be doing that? Mr Harrison: No, not at all. We fully accept that. I think the difficulty comes when the BBC's market dominance and access to content, either archive or potentially in the future on an exclusive basis, risks foreclosing nascent markets or setting market levels that make it very difficult then for the commercial radio sector to make a return. For example, any audio podcast that, for example, Classic FM may want to launch to support its own revenues will be dictated by market price that, for example, would be whatever Radio Three is also offering on podcasting facilities and so forth, and inevitably that means that some nascent markets are foreclosed or the market pricing is not sufficient for the commercial sector to be able to generate a return. So you end up with a vicious circle almost, that the BBC has access to great content, can launch into a market and, with a potentially dominant role, it then forecloses the market. A commercial competitor cannot make a viable return, therefore does not enter the market, so you end up with the BBC as the sole provider. I suspect that is not what any of us want in terms of the plurality of provision and diversity of service in the market. It is when they use their market power potentially to distort or foreclose nascent commercial markets for smaller operators. Chairman: I think we had better move on to the issue which I know all of you are keen to raise. Q71 Paul
Farrelly: This is the local online video
services that have caused quite a lot of controversy. I come from Ms Bailey: It is a broader point than that. We do not mind competition. You have heard that from many speakers this morning. It is unfair competition that we are objecting to. We all love the BBC. Again, we have heard that numerous times this morning. The question is, would we love it quite as much if it were the only thing that we had? A test might have come and gone but we are now talking about £68 million of public money and 65 regional websites containing local video. Again, we have heard this morning that video is an integral part of success on the web but it is difficult to monetise it. Our business online is driven by advertising revenue and to generate advertising revenue we have to have eyeballs. If the BBC come in and distort the market for eyeballs, then there is not an audience there for us to monetise. That is really in essence what we are complaining about. I think it goes further than that because, in addition to these new 65 sites with video, what the BBC are also proposing to do is to launch a map-based news service. This is the real killer blow. They are doing it without reference to further consultation, because apparently - and we do not understand how this is able to go through - they are doing it within the terms of their existing licence. It is a map-based news service that allows the user to effectively personalise that content down to their local postcode area, which competes directly with the regional press both in print and online. You heard from Carolyn this morning that we are essentially all saying that digital is crucial to the success of local journalism. It is not a "nice to have"; it is a "must have", and we are all going as far as to say that the regional newspaper industry will not survive without a successful digital future. Yet, once again, we have an example of the BBC coming in with an enormous amount of resource, an enormous amount of investment, that simply dwarfs what anyone else is able to do. That will distort the market and it will preclude us from investing. Therefore we are back to plurality of voice and the role that we know these great brands, these great institutions play in our community. They are honest, they are apolitical, they are responsible and they are accurate sources of news, and we should be very fearful about losing them. Ms Rasaiah: Can I just stress that that is not just a concern of Guardian Media Group and Trinity Mirror. It is a concern of the entire regional newspaper industry from the big groups down to the family-run titles. They all share the same problems and the same concerns. It threatens all of them. Ms Bailey: The point as well is that our concern is not theoretical. It is about real jobs, real businesses and real people. Q72 Paul Farrelly: I can understand the concerns. They need to be put very forcefully to the BBC, as indeed the questions about their ultra-local TV service. The reality for many of us, as Members of Parliament, around the country, is that in terms of regional newspapers, one newspaper typically in many areas has a monopoly and therefore sometimes it is very difficult - and I am a journalist by background - to see the best standards sometimes in journalism if there is a monopoly supplier. So many of us welcome the presence of BBC radio and independent radio as an alternative outlet. Indeed, some of us have set up websites with public funding through Parliament to be able to have an outlet for news that the papers not might not choose to cover or choose to cover when it suits them. Why should this, in terms of plurality for the consumer of access to local news, not mean that actually the BBC's initiative is welcomed? Ms Bailey: The point is that it is a fallacy to think that we have monopolies in our markets if you think about who we now compete with. The world is now multi-platform. Consumers and advertisers readily move across platforms for their sources of news and information. So on the one hand, we are competing with Google and Right Move both for content and advertising, with radio, with other websites. All sorts of plurality is there. What I would say to you - and let us not overlook this - is that the regional newspaper business is going through a fundamental process of transformation to allow it to be able to compete successfully in the future, and that is multi-media. It is a very difficult transition for us to make and we are all doing the very best that we can at it. The pressures that we have are both cyclical - the current economic situation that we are facing - and structural, which largely comes from digital. This year so far we have closed 44 local newspapers because we simply cannot find a way to sustain them. They are simply not going to be profitable going forward. This will just add to the tensions and the pressures in the market and our ability to continue to invest in local journalism, where we are going to have to invest online because that will be an integral part of the future of local media. I think the important thing is to think about what we are doing as local media, not just local newspapers and therefore who the competition really is here. Q73 Paul Farrelly: Would any of your concerns be lessened if, for example, the BBC were forced to give a commitment that it would not simply aggregate local news stories out of newspapers in the way that some of the online products do already from other companies, or secondly, that they should, as a local service, provides prominently links to websites of local newspapers? Ms Bailey: No, I think they should not be doing this. We have heard this morning that the BBC has lost sight of its strategy. It has lost sight of its purpose. It is too big, too unwieldy, and it is using public money to aggressively compete in areas where it simply does not need to be. All organisations need parameters and they all need targets. Coming back to Worldwide - and I have a lot of experience in dealing with worldwide in my previous company, IPC Media, where, as a magazine publisher, we competed directly with BBC Worldwide as a magazine publisher. I also sat on the Lord Burns Charter Review panel in 2004-2005. The problem we are seeing with the BBC right now is, in its quest to serve all audiences, it is clearly without parameters as a result of that. I would say to you that the management are out of control and the Trust are not in control. We have ended up almost with the worst of all worlds. If you think about what the Burns Committee proposed, which was a board of directors made up of executives and non-executives that very much complies with the Combined Code and that sets the strategy, the performance, the day-to-day governance issues, and then sitting behind that, to regulate, we have the Public Service Broadcasting Commission. If you look at what we are seeing right now, with the Trust and the board, clearly it just is not working. Q74 Paul Farrelly: I want to ask about radio in a moment. Are you saying that, in terms of commercial also, were you to try and enhance the websites of your regional papers in the way the BBC is doing it, it simply would not be commercially viable for you to do that? Ms Bailey: What I am saying is these are new businesses, they are embryonic businesses and they are fragile. They need lots of nurturing. They need lots of development. We carry approximately five videos on our site today. We are continuing to address that. That will continue to grow but the BBC will immediately come in with something that dwarfs our ability to do that because they do not need a commercial return. We have to be able to generate a commercial return to make money to stay alive - it is as simple as that - and they do not, but it is not just the video. We absolutely should not overlook this map-based news service which is coming in underneath the radar, which is a real threat to regional media. Q75 Chairman: Can I just challenge you on one point? You have talked about the lack of parameters, the lack of boundaries. A lot of the evidence we had earlier this morning was about how the BBC is getting into areas which have no relation to programming, far removed from the core purpose. Ofcom's PSB2 research shows that the type of public service broadcasting that the viewers most value is local news. Local news has always been absolutely core to what the BBC does. Arguably it is going to become more important because ITV is getting out of it. Is it not arguable that, if people want to access video content via the Web rather than through scheduled television, the BBC needs to adapt to that behaviour and needs to make available its local news on the Web? Ms Bailey: We cannot look at the BBC just in isolation. We have to look in following that strategy and allowing that to happen at the consequences on the rest of the media market. I say again, we all love the BBC but would we love it quite as much if it were all we had? That is a very real prospect that we will be facing in regional media. Ms Rasaiah: Also, I think it is debatable that it has actually been core, the local news service of the BBC to date. In fact, the BBC is being encouraged to go into the regions and localities, almost to colonise those with services. The service that it is offering is not just local video. Let us not forget it is also news, sport, entertainment, user-generated content, which is the most local thing. The BBC describes it in terms of local, personalised service, whether by postcode or mapping and so on. That is the intention of the BBC, to go in there. It is not the case in the past that the BBC has been able to launch the equivalent of local and regional newspapers in print. Why should it be allowed to do so online, and why should it be allowed to do so using public funds? Q76 Chairman: It is not launching the equivalent of a newspaper. It is making available its video local news online rather than simply on television. Ms Rasaiah: If you actually look at the service description, it is not only local video online. There are also huge swaths of user-generated content which is local news supplied by local people; sport, which is also local and regional news; entertainment, what is going on in the area, which is also local and regional information; and also it will be duplicating areas, for example, that local newspapers already deal with in terms of news, sport, entertainment, local government coverage. To answer your question in terms of why should the BBC be allowed to do these things, it is not actually offering anything new in those areas. Local and regional newspapers are already developing services with local authorities, from webcams to questions and answers over the online services. The BBC is not offering new services. It is actually competing head-to-head with the services already offered. Ms Bailey: It is not distinctive. It is absolutely not distinctive. Mr Vickers: You say they are currently providing local television and local news. It is not as though they are taking what they are currently doing and just releasing it on a different medium. They are going out, spending £68 million of new money, hiring 300 new journalists. It is a completely new strand, a new service. To take up one of the points that Mr Farrelly made earlier on, he said they tried ultra-local video and failed. This is just coming back through the back door, trying to do something that they were not allowed to do before. Q77 Chairman: It was not that they were not allowed to do it. It was that they decided not to proceed with it. Mr Harrison: They decided not to. Q78 Chairman: I want to come back to Sly's point. I have seen a demonstration of it and I agreed with you. From your point of view, if I were sitting in your chair, it is the map-based system which is really scary but, even with the map-based system, I looked at stories around my constituency. There were likely only to be probably two stories flagged within a ten-mile radius of where I live. Two stories compared to the number that appear in a local newspaper - there is no real comparison. A local newspaper provides far greater depth of coverage and a far bigger number of stories than anything that is going to appear on the BBC site. Ms Bailey: But are we really sitting here and thinking, with £68 million and 300 journalists, once we have the search parameters effectively at that level of personalisation and that ball starts rolling, where that will be in one, two or three years time? I do not sit here and think that will be two stories at that point. I think this will be a major plank in their strategy. Q79 Chairman: You know the BBC have given undertakings about not going down any closer? Ms Bailey: But the users will do that for them. Once you have a map-based news service, it will happen. That is what makes it hyper-local. Q80 Chairman: They have also said there will not be more than a few stories. They have actually said they will put a cap on the number of stories. Ms Rasaiah: Those limits do not actually work.
If you look at the limits, yes, they are saying there is a cap but,
first of all, there are all kinds of exceptions, whether it is the Welsh and
English language service, whether it is the Q81 Paul Farrelly: If we made a brave assumption that those journalists the BBC are recruiting for these new local services are not going to be chasing cats up trees or chip pan fires in small villages, is there an argument to say that actually competition drives quality and sets a challenge in terms of quality for the regions that they, like the national press, should rise to it? Ms Bailey: We are inundated with competition, quite frankly, online. We are absolutely inundated with competition. Q82 Alan Keen: We have had people sit in front of us who have said the BBC should not be allowed to have a website at all. They should stick to radio and TV. But they have produced it and it is a wonderful service. I have always looked at the local papers, and I still read them in my constituency but to go down to the shop and buy it, and it is static, that does not compare with the internet. Mirror Group have to move into that very seriously. How long do you think local papers can survive? They cannot survive for more than ten years, can they? Ms Bailey: They can survive in pursuing a multi-platform strategy where newspapers can then sit effectively alongside online and mobile. In our company we now publish over 300 websites and circa 150 newspapers. So look at the investment already. In your own constituency we have an award-winning online site, the website of the year in fact. This is a hugely important part of what we are doing, and we should not underestimate how important our ability to do this is in what is already a very competitive environment. We understand that, we live with that and that is the way of the world. What we are objecting to is this level of unfair competition, which will squash what we are attempting to do and therefore the future and the plurality of local media. Q83 Alan Keen: This is really interesting. We are here to represent our constituents. We want to take a major part in this debate. Give us a chance. Give us some advice. Without saying to the BBC, "You can't do it any more. We're going to regulate you. You can't have websites any more," tell us how. Do we tell them to do it badly instead of in an excellent way? Ms Bailey: I think it is back to purpose. It is back to intent. It is back to strategy. The point is in a multimedia world the BBC can literally roar around the world, it seems to me, as we have heard this morning, doing pretty much anything they want to. Yesterday through the Newspaper Society we launched a legal challenge to the Trust because we feel also, not just in terms of looking at the potential outcome but the process that they are going through is fundamentally flawed. Ms Rasaiah: Yes. First of all, the point that has been made before: on the one hand, you have the BBC Trust encouraging the BBC to extend these local services with taxpayers money. On the other hand, it is supposed to be acting as the independent regulator that is going to determine whether there is a public value in the market impact upon the service. The Committee has been circulated with the letters from the Newspaper Society's lawyers to the BBC Trust and Ofcom which are questioning the process. Information is being asked of the BBC which regional newspaper companies consider imperative that they have in order to assess its impact. That is not being given. Ofcom are expected to look at the absolute effect, actual effect, on the local markets, each individual local market and the service. That is not being done. There has been unilateral change to the timetable, which prevents regional newspaper companies and others of those who are interested in it from actually considering the market impact assessment and the public value assessment before the BBC Trust to be able to make comments on it or to be able to comment on Ofcom's market impact assessment and make those points to Ofcom before they are taken into account with the BBC Trust. Also, the point that has already been made, really that the BBC Trust should be taking care that there should be public confidence in the integrity of the service and that there is actually conduct of an objective public value exercise. Q84 Chairman: You have also criticised Sir Michael Lyons for making public comments in support of the service before the Trust has completed its review. Ms Bailey: In a speech he made an astonishing attack. It was an absolutely astonishing attack from
someone who is supposed to be regulating, not championing the BBC. He actually said, "Nobody can be satisfied
with the quality of local news in most parts of the Mr Harrison: May I come back to Mr Farrelly's original question? You asked why almost from a licence fee perspective or from the public's perspective, the consumer perspective, should we not be pleased about this potential intervention because of the benefits of plurality. I think the case I would make from the commercial radio perspective is just to highlight the very real dangers that I think this could lead to from plurality, because I think it could lead directly to the closure of a number of radio stations which are designed to reinforce that plurality. Remember that local radio is quite heavily regulated. In each local area there are regulations around the provision of two local services plus the BBC. So in your constituency Signal in Stoke and there are a number of other services round about. Q85 Paul Farrelly: It is a great station, Signal. Mr Harrison: I am delighted to hear it. There are, I think, three reasons that this is very concerning to the commercial radio sector and I think are very germane to this debate. The first is the size and scale of the intervention. It has been talked about quite clearly and vociferously and elegantly from the newspaper perspective but it touches on something I said earlier on. Commercial radio is a small sector. The total turnover of commercial radio is smaller than Trinity Mirror Group. As a result, when you have an intervention of £68 million, £23 million ongoing, that is huge in scale compared to local radio. Q86 Paul Farrelly: It will be spread fairly thinly, will it not? Mr Harrison: It is £1 million across 60-plus different sites. To take the context, £23 million a year worth
of investment is three times the market capitalisation of the local radio
company which is the biggest local radio company outside the major groups. The small local radio companies that service
local communities are either part of regional newspaper groups, like Kent
Messenger Group, like Tyndall, like CN Group, who small, self-standing,
independent groups. This absolutely dwarfs
the scale of investment those stations could make but it has two critical
knock-on effects, which is where I think there is a real risk to ongoing
plurality. The first is that the media
base for radio in the Q87 Paul Farrelly: Sly's point I understand. It drives eyeballs away from the growing website activities of the regional newspapers and by extension potentially away from traditional print form. Is your argument that it is driving eyeballs away from your websites or ears as well from your radio? Mr Harrison: I think both are true. Self-evidently, if you have this major investment in a new local media form, the BBC is going to be driving licence fee payers and consumers to want to interact with that site. Every minute they are interacting with that site is a lost opportunity for them to be consuming the local radio, particularly when a large part of the reason to listen in and tune into local radio is what is the latest news, what is it about school closures, what is the traffic situation, the very stuff that is going to be pumped through in real time on its website. So we will lose listeners and the same argument then follows as Sly articulated, around losing listeners means we will net, net, net lose revenue but the longer-term impact in many ways worries me most, which is around the plurality and diversity of the journalistic base in a local market, in 68 local markets. If you are an aspiring young journalist just out of college, it is pretty obvious: where are you going to apply for a job? Where are you going to want to work? Are you going to work for the organisation that has this guaranteed funding, the ability to cover ten new local stories a day in video and post them online. The opportunity for plurality and diversity of news coverage and journalistic excellence I think will be completely swamped by such a huge intervention in the marketplace so quickly, and particularly, of course, at the present time. The chances of the commercial sector doing anything to try and match this and replicate it right now is non-existent. It genuinely risks putting a large number of small local commercial radio stations out of business. It will have the complete opposite effect on plurality that I think is potentially an unintended consequence. One of the concepts that we have been trying to articulate with the Trust and with Ofcom as we have talked about this is considering the net public value that is the result of these proposals. Whether or not you agree there is public value at all, and clearly the newspaper groups have articulated their position, this is clearly a proposal where there is a tension between some potential public value on the one hand and some clear market impact on the other. This will be a difficult decision. We understand that, but the net public value that we would argue is going to be generated by this proposal is clearly very negative. If the BBC ends up spending a large amount of public money launching a new service that in the end reduces plurality in local areas, reduces journalistic competition, takes audiences away from local radio stations and deprives local radio stations of the opportunity to build nascent online businesses themselves, that net public value is severely detrimental to the overall plurality of the media ecology in the UK. Q88 Chairman: In local markets, do you accept there is any validity in the charge that newspapers have been pretty slow off the mark, and actually in large part the content available online is still pretty inadequate? Ms Bailey: Newspaper website of the year, 300 launches so far? No, I do not. Clearly, we do have to make a commercial return, so we are not able to enter markets in the same way that the BBC does because we have to make that commercial return, but I would say that that is absolutely false. Q89 Chairman: The assurances that the BBC have given that they have no interest in getting into the areas which generate your revenue, like classified advertising and dating and selling cars and advertising jobs, do not make it any better? Ms Bailey: It is a red herring because it is the eyeballs that generate the revenue and their particular focus will be news and sport, and those are absolutely the heartlands of regional media. Chairman: You have given us plenty to raise with the BBC in two weeks' time. Thank you very much.
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