BBC Commercial Operations - Culture, Media and Sport Committee Contents

3  Governance

The four commercial criteria

17. The BBC's commercial operations are governed by a set of requirements outlined in clauses 68-74 of the BBC's Agreement with the Secretary of State.[39] Those clauses require that the BBC's commercial operations must adhere to four commercial criteria (often referred to as the "4 Cs"). The BBC's commercial activities must comply with all the following criteria:

  • Fit with the BBC's public purposes;
  • Exhibit commercial efficiency;
  • Not jeopardise the BBC's good reputation or the value of the BBC brand; and
  • Comply with the BBC's fair trading guidelines, in particular avoiding market distortion.[40]

18. BBC Worldwide's compliance, or otherwise, with these criteria was the central theme to our inquiry. Several witnesses presented evidence arguing that the BBC's commercial operations no longer satisfied these requirements or that they are sufficiently vague so as to allow a loose interpretation of them. The BBC, on the other hand, sought to defend its activities. We return to the specific criteria throughout the remainder of our report, but it is necessary here to consider the crux of the dispute.

19. The last of the commercial criteria necessitates compliance with the BBC's fair trading guidelines, and these have recently been subject to change. As part of the process for the renewal of the BBC Charter in 2006, the BBC and the Trust redrew the fair trading guidelines to which Worldwide was subject. Whilst the previous fair trading commitment stated that commercial activities must "plainly arise from and support BBC programmes", the 2007 BBC Trust redraft instead requires that the activities "must link clearly […] with the ways in which the BBC promotes its public purposes".[41] As the Guardian Media Group pointed out to us, this means that the rules surrounding BBC Worldwide's activities have been "loosened significantly since 2007".[42] It is this change in the rules, and BBC Worldwide's exploitation of the change, that has allowed the expansion and diversification in Worldwide's activity. Recent growth in Worldwide has included:

  • New magazine launches in the UK, plus a joint venture to publish Hello and Grazia magazines in India;[43]
  • The launch of several commercial websites containing advertisements;[44]
  • The acquisition of stakes in production companies based in Australia, Russia, Argentina and Canada, as well as several in the UK;[45]
  • The launch of new international television channels, bringing Worldwide's portfolio to a total of 29 channels.[46]

20. However, the most controversial new activity has proved to be the acquisition of the travel information group, Lonely Planet Publications. The basis for this acquisition was outlined by Worldwide in its latest Annual Review:

    "The Board identified the need to achieve some growth through acquisition and we set clear criteria to help us assess opportunities swiftly. The global travel information company Lonely Planet offered a clear fit with these criteria and, after appropriate consideration by our Board, the BBC Executive Board and the BBC Trust, we bought a 75% stake in the business in October 2007".[47]

21. Worldwide's recent expansion leads Pact, the trade association that represents the interests of the independent production and distribution sector, to state that "we cannot see how several of BBC Worldwide's current activities […] bear any meaningful relation to its public purposes".[48] Similarly, FremantleMedia, a large independent creator and distributor of television content, contends that Worldwide is "embarking on an aggressive, financially-driven overseas acquisition strategy which has no discernible connection to the BBC's public purposes".[49] The Director General of the BBC maintained that the vast majority of Worldwide's activity is based around BBC intellectual property.[50] Nevertheless, the Chairman of the Trust accepted that "there is a case [for reining back the BBC's commercial operations], and we intend to move forward with tightening the boundaries around Worldwide activity".[51] In its interim statement, the Trust has subsequently signalled its intention to "establish a more contained focus for [Worldwide's] operations".[52]

22. There is clearly a balancing act between allowing Worldwide to expand and potentially generate greater returns for the BBC, and limiting its operations in order to ensure it upholds the BBC's reputation and does not unfairly distort the market. We believe the pre-2007 model, which tied Wordwide's activities to BBC programming, supplied the appropriate balance. We are concerned that the rules governing the BBC's commercial operations have since been loosened and no longer make this explicit requirement. We believe that this has tipped the balance too far in favour of Worldwide's expansion. The four commercial criteria are vague, allowing the BBC to interpret and justify them in its own favour. This is evidenced by the raft of new businesses in which BBC Worldwide has recently become involved, such as its part ownership of overseas production companies and magazines, and its controversial acquisition of Lonely Planet. We recommend that the commercial criteria and fair trading guidelines should be returned to the pre-2007 position, whereby all commercial activity must have a clear link with core BBC programming. The provisional comments by the Chairman of the Trust, and the Trust's interim statement, suggest a degree of support for our position, and we encourage the Trust to act on this commitment.

The role of the BBC Trust

23. The BBC Trust is the body that oversees the BBC, having replaced the previous oversight body, the Board of Governors, on 1 January 2008. It claims to be "independent of BBC management and any external body, leaving it free to meet its clear responsibility to operate only in the interests of all licence fee payers".[53] It has responsibility both to regulate the BBC, and to set its strategic direction, conflicting requirements in the view of some of the witnesses to this inquiry. For instance, the Guardian Media Group argued that this dual function is "extremely confusing" and that instead "a regulator should be unambiguously a regulator; that is all they should do—regulate".[54] The role of the Trust has been blurred further by recent statements in which its Chairman has seemed to act as an apologist for the BBC, defending the business interests of the BBC, rather than the interests of the licence fee payer. For instance, in his speech to the Broadcasting Press Guild in October 2008, he said "I question the thinking behind a proposal to gift BBC Worldwide to Channel 4. Put aside for a moment whether this is actually legal, State Aid issues, and the merits of removing £100 million a year of dividends back to the public via new BBC programmes. In what way might this make business sense for BBC Worldwide or Channel 4?".[55]

24. However, the Chairman of the Trust defended the BBC's governance framework, telling us: "It is quite a complicated model but it is one carefully determined by Parliament to reflect the status of the BBC as an organisation which is funded by universal levy, the licence fee, but where the most important principle was to protect its editorial independence".[56]

25. Other witnesses questioned the Trust's effectiveness specifically in relation to its regulation of the BBC's commercial activities. The Chairman of Time Out Group expressed doubt that the Trust, despite the "62 people who work for it and a budget of £11 million", had the track record to be able to hold an enormous organisation such as the BBC to account.[57] Meanwhile, Pact argued that the Trust does not have any effective oversight of BBC Worldwide and that, in reality, commercial operations are managed exclusively by the Executive.[58]

26. We asked Lord Carter, the Minister for Communications, Technology and Broadcasting, if he was satisfied with the Trust's effectiveness as a credible check on the BBC's commercial ambitions. He told us:

    "Creating institutions fast is a contradiction in terms because you need some time to do that and the BBC Trust is still [in its] relatively early days. Is it an improvement on the completely integrated governing structure that there was before? I think on balance, yes. Is it a forensically separate structure where accountability sits clearly in one place and regulatory responsibility sits clearly and singularly in another? No, it is not, but it never was".[59]

27. BBC Worldwide's new investment projects are subject to approval by different bodies depending on a number of factors, including transaction value. Transactions with a value of over £50 million automatically require approval by the BBC Trust. The BBC claims that this threshold is "low in financial terms compared to the equivalent 'shareholder consent' requirement for publicly listed companies".[60] Pact, Fremantle and Guardian Media Group told us, however, the £50 million threshold is extremely high in comparison to the commercial sector.[61] Indeed, £50 million is nearly half of the £118 million profit that Worldwide generated last year. The result, Fremantle concludes, is that very significant investments can be made by BBC Worldwide without authorisation from the Trust. This point was demonstrated when the BBC was able to provide us with only one example—Worldwide's acquisition of Lonely Planet—whereby the £50m threshold had been breached.

28. Several witnesses called for the £50 million threshold to be lowered considerably, with the Guardian Media Group suggesting that the ceiling value be benchmarked against other media boards.[62] Fremantle could not give us the corresponding threshold figure(s) that it uses due to commercial confidentialities, but its Chief Executive did tell us it "would be a major order of magnitude less than £50 million".[63]

29. In addition to the automatic referral system, the BBC Executive Board may also refer decisions to the BBC Trust "where they represent reputational issues or matters of wider significance for the BBC".[64] We asked the Chairman of the Trust for specific instances whereby the Trust had considered the merits, or otherwise, of a BBC commercial activity. He offered three examples:

  • The acquisition of Lonely Planet, which the Trust ultimately approved;
  • The decision to allow advertising on Worldwide's website, again approved by the Trust;
  • The proposed "Kangaroo" joint venture video on demand service, on which the Trust claims it did not take a view, given the Competition Commission's inquiry that ultimately ruled against it.[65] However, as we concluded in our recent report on the BBC Annual Report 2007-08, it is apparent that the Trust reviewed proposals for a joint venture at a number of stages.[66]

30. Neither the nor Kangaroo issues came up against the £50 million ceiling but, according to the Trust Chairman, both matters "automatically came to the Trust—it was not a question of being referred—because they were matters of novel activity".[67] This would seem to suggest a third means for engaging the Trust, one which required neither referral nor a breach of the £50 million threshold. The BBC Trust also accepted that, as yet, there had been no occasion where the Trust had rejected outright a BBC commercial activity.[68]

31. With respect to acquisitions and major investments, there are two issues the Trust needs to consider: firstly, the threshold for authorisation and secondly, transparency—that is, the details the BBC should make public. For quoted companies, the Stock Exchange imposes strict rules in these respects for good reason: to protect the interests of shareholders. In evidence to us the Trust, the BBC and Worldwide stressed that they followed an equivalent process.[69] The analogy to a quoted company should not be taken too far—as the Trust has a wider remit than simply acting, in effect, as the controlling shareholder for the licence fee payer—but it is instructive.

32. The BBC followed up with a written submission to us showing how the Stock Exchange's four different "Class Tests" had been calculated for the acquisition of Lonely Planet.[70] These tests govern the amount of disclosure, and if a deal falls into the "Class 1" category, it requires shareholder approval. The BBC maintained that on these tests Lonely Planet was only "Class 2", not requiring approval—yet because of its own threshold rule, Trust authorisation was actually required. On that basis, the BBC argued, Worldwide operates within a stricter system than similarly sized public companies.[71]

33. In reality, however, Worldwide is not publicly quoted and two of four tests—which include measures of market valuation—do not apply.[72] In such circumstances, it might be reasonable to substitute either Worldwide's gross or net assets as a proxy. In 2007, these stood at £410.5 million and £119 million respectively.[73] On either of these bases, the price for Lonely Planet would fulfil the Class 1 requirements for approval, being above a 25% ratio. Using net assets would be much more conservative, but would acknowledge the risks of a large deal relative to the size of Worldwide's balance sheet. It could also be used to support assertions from witnesses that the Trust's £50 million threshold is, indeed, too high. Based on Worldwide's net assets, the 25% test would currently suggest £30 million to be a more appropriate threshold.[74]

34. Regarding disclosure, the Lonely Planet purchase was announced in a press release by Worldwide on 1st October 2007.[75] In its follow-up evidence, the BBC said: "The level of disclosure provided by BBC Worldwide was therefore no less than would have been required if BBC Worldwide was a plc given that the size of the acquisition was equivalent to that of a class 2 transaction".[76]

35. This statement from the BBC, however, is mistaken. Unsurprisingly, Stock Exchange disclosure requirements are not just satisfied by the issue of a press release, but by its content. For a "Class 2" deal, its rules require disclosure of the price, the assets and profits of the business and details of any money payable later on (Class 1 requirements are more onerous).[77] Neither the BBC, nor the Trust in its own release, disclosed any financial information about Lonely Planet at all, however.

36. In evidence, competitors including Time Out and Wanderlust complained that it was difficult to establish and comprehend the price the BBC had paid, and therefore whether it was distorting the market.[78] Their concerns are justified. Before the BBC's evidence to us, the details could only be gleaned from a careful examination of the notes to the BBC and Worldwide accounts for the year ending 31st March, 2008, which were published in mid-June that year, over eight months after the acquisition.[79]

37. Even then, Worldwide's Annual Review was less than forthcoming about the total valuation of Lonely Planet. Its summary puts the cost of 75% of the business at £89.9 million.[80] Readers have to turn to the small print of the BBC's own accounts regarding the remaining 25% retained by Lonely Planet's founders. This was subject to a "put option" whereby the BBC had agreed to pay a further Aus$67.3 million (£28.8 million then, and £31.9 million at current exchange rates) if it were exercised by 31st October, 2009.[81] In evidence, the BBC stated that this was a fixed price due to the founders, irrespective of the performance of Lonely Planet post-acquisition.[82]

38. To say, therefore, that the BBC has been less than forthcoming, in a timely fashion, about the Lonely Planet deal is an understatement. Limited companies, whether publicly listed or private, are obliged to follow accounting standards regarding information about acquisitions in their accounts. The BBC seems to be under the misapprehension that in satisfying these standards, it has disclosed everything a listed company would be obliged to do. It has not, however. Far from acting like a publicly quoted company, as it maintains, the BBC has behaved like a private firm, only formally disclosing financial details when required for its accounts. And this is more than just academic; the licence fee payer, like any shareholder, needs to be able to assess whether public money is being used wisely.

39. In evidence, the Trust, BBC and Worldwide said they were satisfied that the price was fair and reasonable.[83] Worldwide's Chairman, Etienne De Villiers, told the Committee: "Having come from a world of private equity […] we went through this with significant due diligence".[84] "We were not anywhere close to where I felt as a non-executive and the other two non-executives from outside the company with good commercial experience felt that we were overpaying for the business. We simply were just not overpaying," he added.[85] Competitors, including Time Out, begged to differ.

40. The reality is that we cannot judge. From the evidence, we know now that the BBC agreed to pay £118.7 million for a business which lost £2.1 million in 2007-08 on turnover of £45.7 million.[86] Moreover, the BBC has added that "the book publishing activities accounted for 87% [£103 million] of the value attributed to Lonely Planet, with the balance represented by the online activities".[87] Sadly, it has given no further breakdown. In evidence, the Trust's Chairman said: "Things have developed, as we have expected, but it still remains a matter for further reflection whether this merger will deliver all of the benefits that we expected for this purchase. Does that surprise me at this point […]? No, it does not. But the case is still to be proved".[88]

41. We believe that the £50 million threshold at which a commercial transaction is referred to the Trust is too high. The BBC's claim that it is low is based on a misleading comparison with the shareholder consent requirements of publicly listed companies. We note that in the past "novel" activities have been automatically considered by the Trust and any threshold should, of course, not be a substitute for discretion. Nevertheless, it is alarming that, in theory, a commercial transaction equivalent in value to almost half of Worldwide's net assets or its shareholders' funds could escape the need for the Trust's approval. We believe the threshold should be lowered considerably, to allow the Trust more scrutiny and a greater say in the BBC's commercial decisions. We have suggested that £30 million may be more appropriate, based on 25% of Worldwide's net assets. To recognise the Trust's unique regulatory role (and cater for the arbitrariness often found in balance sheet valuations), we would be more conservative still. We would urge the Trust to consider a level where the value of the investment exceeded 25% of Worldwide's pre-tax profits (before exceptional items) in the previous year. Currently, this too would approximate to £30 million. We recommend that the Trust should, as a matter of priority, review the threshold level and report back to us on its findings.

42. The BBC has also been less than transparent about its commercial investments, notably Lonely Planet. In evidence to us, the Trust Chairman Sir Michael Lyons said: "I can offer a willingness […] to test that proposition about whether the levels of disclosure are less than you would expect of a plc in this setting. If you have a point, then that is something that the Trust will want to take on board".[89] We recommend, therefore, that the Trust also considers and reports back on the Committee's and the industry's concerns about disclosure and transparency.

43. With respect to directorships too, BBC Worldwide is less transparent than publicly quoted companies. The remuneration, including bonuses and benefits, of its Chief Executive is disclosed in the BBC's main accounts by virtue of his being an Executive Director of the main board, as is that of two of Worldwide's non-executive directors who also sit on the main BBC board. Worldwide's Annual Review, however, makes no comparable disclosure with respect to its remaining executive and non-executive directors. Instead, it simply describes Worldwide's approach and policy in two brief notes in the Review.[90] In order to better understand the incentives within Worldwide, and whether remuneration is in line with comparable media companies, we believe full disclosure should be made for all its directors.


44. The BBC Executive Board, with ten executive and six non-executive members, has responsibility for delivering the BBC's services in line with the priorities set by the BBC Trust. One of its executive members is John Smith, the Chief Executive Officer of BBC Worldwide. As a result, BBC Worldwide has direct representation on the BBC Executive Board.

45. At the same time, BBC Worldwide also has its own Board (eleven executive members, including John Smith, and six non-executive members), which operates under the BBC Executive Board. Amongst its non-executive Directors are Zarin Patel, BBC Group Finance Director, and Jana Bennett, Director of BBC Vision (the in-house television production arm of the BBC). As both are also members of the BBC Executive Board, the BBC Executive therefore has direct representation on the Worldwide Board. These three cases of Directors sitting on both boards were frequently referred to in our inquiry as "cross-Directorships".

46. The BBC Trust told us that the cross-Directorships had come about in an attempt to balance the "commercial imperative for BBC Worldwide" against the four commercial criteria, in particular the requirement that the BBC's reputation should not be damaged.[91] The Director General explained further, arguing the case for "close coordination" between Worldwide and the BBC's public services. He told us the cross-Directorships helped to "make sure that we have the commercial operations of the organisation seen in the context of the total mission of the organisation".[92]

47. Specifically, the BBC justified John Smith's membership of the Executive Board on two counts. Firstly, "he represents BBC Worldwide in their role contributing towards the BBC's delivery of its Public Purposes, in particular the fifth purpose, 'bringing the UK to the world and the world to the UK'".[93] Secondly, "he is accountable to the Board for BBC Worldwide's management of BBC content and brand in BBC Worldwide's capacity as the main distributor, and for the performance of BBC Worldwide in the BBC's capacity as shareholder".[94] The BBC offered no specific justification for Zarin Patel and Jana Bennett's membership of the Worldwide Board, other than the need for "close coordination".[95]

48. The BBC's fair trading guidelines state that its commercial services must always maintain "a clear and separate management structure" from the BBC's public service activities.[96] The BBC's public service activities must not "provide the commercial subsidiaries with access to information (or resources) beyond what would be strictly necessary for the efficient commercial exploitation of a particular right or asset owned by the BBC's Public Services".[97] Several witnesses argued that the cross-Directorships are in clear breach of these requirements.

49. Fremantle claimed that the cross-Directorships give Worldwide an "unfair commercial advantage because [Worldwide] 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".[98] Specifically, Fremantle argued that the cross-Directorships give Worldwide "very significant contractual and informational benefits unavailable to the BBC's commercial competitors".[99] Pact, told us that it "cannot see how the BBC can ensure an appropriate level of separation between its two activities under these circumstances".[100]

50. When we put these concerns to the BBC, the Trust Chairman conceded that it represented something of a dilemma: "you might say commercially and in fair trading terms there should be clearer separation, but then you come back to the fact that brand management and protection of reputation requires very close working".[101] That said, the Executive's view remains "that BBC Worldwide representation on the Executive Board does not make it privy to information which gives, or would give, it an unfair commercial advantage over its competitors".[102] The Director General insisted that John Smith would not have access to market sensitive programming or talent specific information, "bluntly because the discussions in the Executive Board are strategic ones".[103] Nevertheless, the Chairman of the Trust hinted that changes to the current arrangements were being considered, though we note that there was no specific mention of the cross-Directorships in the Trust's interim statement.[104]

51. We accept that the BBC's representation on the Worldwide Board, especially at Finance Director level, permits financial oversight and helps ensure coordination between the two organisations. However, we find it impossible to accept the justification for the presence of the Chief Executive of BBC Worldwide on the BBC Executive Board. We disagree with the BBC's assertion that this does not give Worldwide a significant, unfair advantage over its competitors. Even if the BBC's claim that Board level discussions are purely strategic and of little benefit to Worldwide has some credence, it still creates an unwelcome perception of special favours. It appears from the comments by the Chairman of the Trust that a revision of this arrangement is already being considered. We accept that the Executive and Worldwide may derive some operational benefits from the presence of the Worldwide Chief Executive on the BBC Executive Board, but believe that the BBC should seek to achieve these via other means which do not contravene its fair trading guidelines. We therefore recommend the removal of Worldwide's representation on the BBC Executive Board. This would represent one practical step towards a more transparent, regularised and arms-length commercial relationship between the BBC and Worldwide.

39   Department for Culture, Media and Sport, Broadcasting: An Agreement between Her Majesty's Secretary of State for Culture, Media and Sport and the British Broadcasting Corporation, Cm 6872, July 2006, pp 37-39 Back

40   Department for Culture, Media and Sport, Broadcasting: An Agreement between Her Majesty's Secretary of State for Culture, Media and Sport and the British Broadcasting Corporation, Cm 6872, July 2006, p 37 Back

41   Ev 47; BBC: The BBC's Fair Trading Guidelines, July 2007, para 2.12 Back

42   Q 35 Back

43   BBC Worldwide: Annual Review 2007-08, July 2008, pp 29-30; Q 37 Back

44   BBC Worldwide: Annual Review 2007-08, July 2008, p 23; Q 48 Back

45   Q 2 Back

46   BBC Worldwide: Annual Review 2007-08, July 2008, p 19 Back

47   BBC Worldwide: Annual Review 2007-08, July 2008, p 10 Back

48   Ev 11 Back

49   Ev 2 Back

50   Q 126 Back

51   Q 126 Back

52   "BBC Trust review of the commercial activities of the BBC-interim statement", BBC Trust press release, 4 March 2009 Back

53   Why the BBC Trust?, Back

54   Q 38 Back

55   Speech by Sir Michael Lyons to the Broadcasting Press Guild, 15 October 2008 Back

56   Q 131 Back

57   Q 40 Back

58   Q 34 Back

59   Q 263 Back

60   Ev 92 Back

61   Qq 5, 38 Back

62   Q 38 Back

63   Q 5 Back

64   Ev 92 Back

65   Culture, Media and Sport Committee, Fourth Report of Session 2008-09, BBC Annual Report and Accounts 2007-08, HC 190, Ev 27 Back

66   Culture, Media and Sport Committee, Fourth Report of Session 2008-09, BBC Annual Report and Accounts 2007-08, HC 190, para 14-18 Back

67   Q 145 Back

68   Qq 146-147 Back

69   Ev 139 Back

70   Ev 139 Back

71   Ev 139 Back

72   Financial Services Authority, Handbook, accessed online March 2009,, London Stock Exchange Listing Rules, Section 10, Annex 1 Back

73   BBC Worldwide: Annual Review 2007-08, July 2008, p 38 Back

74   25% of BBC Worldwide's net assets of £119 million equals approximately £30 million  Back

75   "BBC Worldwide acquires Lonely Planet", BBC Worldwide press release, 1 October 2007 Back

76   Ev 139 Back

77   Financial Services Authority, Handbook, accessed online March 2009,, London Stock Exchange Listing Rules, Sections 10.4, 10.5, 13.4 and 13.5 Back

78   Qq 40, 45 Back

79   BBC, Part Two: Annual Report and Accounts 2007-08, June 2008, p 130; BBC Worldwide: Annual Review 2007-08, July 2008, p 34 Back

80   BBC Worldwide, Annual Review 2007-08, July 2008, p 34 Back

81   BBC, Part Two: Annual Report and Accounts 2007-08, June 2008, p 130. "Current exchange rates" as on 23 March 2009 Back

82   Qq 229-231 Back

83   Ev 128-129; Q 232 Back

84   Q 232 Back

85   Q 232 Back

86   Ev 139 Back

87   Ev 138 Back

88   Q 156 Back

89   Q 161 Back

90   BBC Worldwide: Annual Review 2007-08, July 2008, p 47 Back

91   Q 133 Back

92   Q 134 Back

93   Ev 136 Back

94   Ev 136  Back

95   Q 134 Back

96   BBC: The BBC's Fair Trading Guidelines, July 2007, para 3.6 Back

97   BBC, The BBC's Fair Trading Guidelines, July 2007, para 3.6 Back

98   Q 18 Back

99   Ev 2 Back

100   Ev 22 Back

101   Q 134 Back

102   Ev 136 Back

103   Q 136 Back

104   Q 136; "BBC Trust review of the commercial activities of the BBC-interim statement", BBC Trust press release, 4 March 2009 Back

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