BBC Programming
53. BBC Worldwide has an exclusive "first look"
option on the rights to all BBC programming.[106]
When new rights become available, Worldwide makes an assessment
of their value and the return on sales they would be likely to
generate. Based on this assessment, it may choose to submit a
bid to the BBC's (public service) Commercial Agency, which itself
makes an estimate of the value of the rights. If Worldwide's bid
is at "the same sort of level" as the Commercial Agency's
estimate, then Worldwide acquires the rights.[107]
Under such a scenario no other distributors would have a chance
to bid, and, as the BBC readily admits, in this sense Worldwide
is its "preferred partner".[108]
54. If Worldwide's bid for the rights to a particular
programme does not match the value attached to it by the BBC,
or if Worldwide simply chooses not to bid, the programme is put
on the open market and sold to the highest bidder. As a result,
the BBC estimates that 20% of its output is sold to other distributors.[109]
Recent examples include House of Saddam, which was sold
to HBO, and the DVD rights for That Mitchell and Webb Look,
which went to Fremantle.[110]
However, it is worth noting that if Worldwide's initial bid is
unsuccessful, it may still make a further bid during the subsequent
competitive bidding stage.[111]
The BBC insists that Worldwide has no "matching right"
during this stage; if Worldwide is successful, it is purely on
the basis of having submitted the optimal bid.[112]
55. All witnesses agreed that the issue of primary
importance is obtaining maximum value for the licence fee payer
from the sale of the rights to the BBC's programmes. Where opinions
differed was on the best means to achieve this. Independent producers
and distributors, including the trade association Pact, argued
that the current "first look" arrangement enjoyed by
Worldwide fails to achieve the best price for the BBC. The BBC
denied that that was the case, but due to commercial sensitivities
refuses to make public the price it receives for particular programme
rights.
56. The BBC's Commercial Agency makes its assessment
of an acceptable price for the rights to a particular programme
via the process of benchmarking. The BBC's Chief Operating Officer
told us what this involves:
"They [the Commercial Agency] analyse the
returns from previous exploitation of similar programmes by Worldwide,
they look at what they have got in the market from selling similar
programmes to other distributors, and they make an assessment".[113]
57. This process may generate a figure that the BBC
considers a fair rate, but, as Pact explained, it does not represent
a "market rate".[114]
Pact told us that this can only ever be established by actually
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".[115]
The Chief Executive of Fremantle explained the problem further:
"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".[116]
58. Fremantle has, in fact, recently acquired the
rights to Merlin[117]
which, because it was independently produced, was sold on the
open market (as explained in the next section). Worldwide had
been outbid for these rights, thereby indicating that in this
instance, via open market competition, the production company
had achieved a better deal than it would have if Worldwide had
been the only bidder. Both Pact and Fremantle therefore argued
that the very same benefits are available to the BBC itself, if
it opened up its programming to the free market.[118]
59. The BBC defended the "first look" arrangements
on several counts. The principle behind having a preferred distributor
is that Worldwide is given "the incentive and the means to
make the big investments necessary to build brands over a long
period of time".[119]
The BBC also claims its relationship with Worldwide ensures the
protection of the BBC brand, something it believes would be "extremely
difficult" to duplicate via contractual or licensing arrangements.[120]
Furthermore, the ownership link between the BBC and Worldwide
means that the BBC receives the entirety of the generated proceeds.
When the BBC licenses to third parties, it loses the profit margin
on the exploitation of rights that other distributors are able
to achieve.[121] Finally,
the BBC questioned whether selling on the open market would be
commercially efficient.[122]
It made this claim despite the existence of its Commercial Agency
which could arguably undertake the task, and Pact and Fremantle's
insistence that it would not require particularly onerous processes.[123]
60. The BBC also pointed out that "first look"
agreements are consistent with wider market practice, citing the
relationships between ITV and Granada International, and Time
Warner and Warner Bros Distribution.[124]
61. The BBC's arrangements were, however, criticised
by the media regulator Ofcom, which had examined the BBC's approach
in considering the BBC's fair trading guidelines. Ofcom set out
its view to us as follows:
"The preferred partnership status enjoyed
by BBC Worldwide would appear to undermine many of the perceived
regulatory benefits resulting from the system of pseudo-separation
operated by the BBC. Whilst it may be theoretically possible
to detect price-based forms of discrimination through conventional
means, such as benchmarking and cost-based pricing, such methods
are unlikely to be effective for the detection of non-price methods
of discrimination. As we understand it, the preferred partnership
relationship incorporates a close operational relationship, providing
scope for both price and non-price forms of discrimination".[125]
62. One possible solution to the discrimination identified
by Ofcom would of course be to require the BBC to allow a free
bidding system for the rights to all its productions. The BBC
did accept that it "must strike a balance between offering
an appropriate amount of programming to the marketplace whilst
ensuring that the pecuniary and non-pecuniary benefits of its
vertically-integrated distribution model are fully realised".[126]
It believes the current 80-20 split in rights between Worldwide
and third parties represents the "optimal outcome",
but one which is "monitored closely".[127]
In its interim statement, the BBC Trust insists that the rationale
in favour of the "first look" arrangement "remains
strong", reiterating the view of the BBC that it enables
it to control the BBC brand.[128]
63. The BBC must aim to obtain as much value as
possible from its programme sales in order to benefit the licence-fee
payer. Yet it is difficult to judge whether it is generally obtaining
the maximum value. The benchmarking process it uses is inadequate
in comparison to competitive auctions which can drive up the value
of programme rights. At the same time, Ofcom has raised serious
doubts over the fairness of a system which grants BBC Worldwide
preferred distributor status. We believe the solution to both
these issues is to make the BBC's process for programme sales
more transparent, and increasingly open up the market for the
BBC's programmes to competitive bidding. We reject the BBC's suggestion
that a competitive bidding process would be commercially inefficient.
The BBC already has in place a Commercial Agency which must surely
have the capability successfully to oversee such a process. The
same Agency could also arrange licensing and contractual arrangements
with successful bidders, so as to mitigate any possible damage
to the BBC brand. What we propose here would not spell the end
for BBC Worldwide's sales and distribution business. Clearly,
given its background and track record, it would still stand a
good chance of acquiring many programmes. However, it would ensure
that Worldwide always paid the full market value to the BBC and
hence the licence fee payer. We accept that the BBC will not be
able to effect this transformation overnight, but we recommend
that it now begins a steady migration away from the "first
look" arrangement by opening up an increasing number of programmes
to competitive bidding. We urge the BBC Trust to reconsider its
interim judgement on the "first look" arrangement.
Non-BBC Programming
64. BBC Worldwide also bids to acquire the rights
to programmes from independent producers. Fremantle told us that
in these type of transactions, they had witnessed Worldwide making
surprisingly high bids.[129]
Evidently, this was not the case with respect to its bid for Merlin,
the rights to which were acquired by Fremantle (as outlined in
Paragraph 58). Pact and Fremantle alleged that Worldwide may,
on occasion, deliberately overbid for programme rights. They suggested
its motives could be to:
- Drive sales of its catalogue
(new high profile programmes are essential to a distributor);[130]
- Ensure that high profile programming broadcast
by the BBC is not distributed by anyone else.[131]
65. The result, Fremantle contends, is that commercial
competitors are forced out of the market because they cannot compete
with the "uneconomic rates" BBC Worldwide may be paying.[132]
Although distribution rights are in theory controlled by independent
producers, in reality the BBC has significant leverage because
of its power over commissioning decisions. Fremantle states that
it is "aware of reports of overpaying and of reports by producers
that they were threatened by the loss of a commission if they
did not give rights to BBC Worldwide".[133]
We have been unable to substantiate these claims. It may be that
this fear of reprisals makes independent producers and distributors
who are heavily reliant on business with the BBC unwilling to
go "on the record".
66. The Chief Executive of Worldwide countered these
accusations by insisting: "the return we are making at the
moment is 13% return on sales across the entire group. That is
a good return in the context of the media industry, and we can
only be doing that if we are paying a relevant price for the programmes.".[134]
However, Pact told us that due to the lack of transparency in
Worldwide's accounts, it is impossible to know whether Worldwide's
profits are as high as they should be.[135]
67. The Committee has insufficient information
available to determine the truth of the claims that Worldwide
may be overpaying for programme rights from independent producers.
However, we do recommend that the Trust satisfies itself that
Worldwide is not overbidding and, to balance things out, potentially
undervaluing rights to the BBC's in-house productions.
105 BBC Worldwide, Annual Review 2007-08, July
2008, p 27: £46.7 million out of a total profit of £117.7
million Back
106
Ev 136 Back
107
Q 184 Back
108
Q 184 Back
109
Ev 133 Back
110
Ev 134 Back
111
Ev 136 Back
112
Ev 136 Back
113
Q 184 Back
114
Q 11 Back
115
Q 11 Back
116
Q 14 Back
117
A drama series first shown on BBC television. Back
118
Q 9 Back
119
Q 189 Back
120
Ev 135 Back
121
Ev 133 Back
122
Q 192 Back
123
Ev 19; Qq 21-23 Back
124
Ev 133 Back
125
Ev 184 Back
126
Ev 133 Back
127
Ev 133 Back
128
"BBC Trust review of the commercial activities of the BBC-interim
statement", BBC Trust press release, 4 March 2009 Back
129
Ev 4; Qq 4, 11, 15 Back
130
Ev 4 Back
131
Ev 4 Back
132
Ev 4 Back
133
Ev 4 Back
134
Q 171 Back
135
Q 7 Back
